We don’t believe a long-term investor should lose sleep over the current debt ceiling crisis. Unlike issues over which the crisis is being fought, like massive government spending and future tax rates, the debt ceiling is a short-term issue. It can’t sustain itself. Or, in the words of Stein’s Law…if something cannot go on forever, it will stop. Both sides of the aisle have taxpayer money they want to part with, be it to social programs, the military, etc. They will eventually raise the debt ceiling, allowing funding for their favored projects.
What investors should be focused on is whether the bluster out of Washington will impact the future of corporate earnings and interest rates. Those are the main determinants of stock and bond prices and whether the debt ceiling is $31 trillion (the current level) or a couple of trillion higher will have little to do with corporate
earnings.
Could an increase of the debt ceiling cause interest rates to rise? For the answer, let’s look at the debt ceiling crisis during 2011. During that crisis, which ended without a government shutdown, Standard & Poor’s lowered the credit rating of the United States from AAA to AA+. Yet nine years later, without regaining the AAA rating enjoyed by Denmark, Germany, Canada and a small handful of other countries, the U.S. Treasury was able to issue debt (sell treasury bonds and bills) at record low interest rates. There is simply much more to the level of interest rates than a debt ceiling, or apparently, a AAA bond rating.
But the “noise” will continue. Next up, brace for impact from a government shutdown. Like those of us at Normandy, you may recall where you were or what you were doing when specific major events happened. The JFK assassination, 9-11, the loss of the Space Shuttle Challenger, etc. Unless you had a vacation that found a padlock on a federal museum, you probably don’t remember the dates for any prior government shutdown. Yet, the federal government has shut down many times.
Specifically, during 1981, 1984, 1986, 1990, 1995-1996, 2013, Jan 2018 and 2018-2019. The “noise” is the clamor surrounding each event, but we should listen for the important signals. What are they? First, each debt ceiling crisis ended…Stein’s Law
Second, the level of stock prices after each successive debt ceiling crisis is higher than the previous one. Why? Primarily because corporate earnings have grown over time, specifically from the end of one crisis to the beginning of the next. It is said that men come and go, but earth abides. Well, debt ceilings come and go, but
Boeing sells more airplanes, P&G sells more detergent, and Apple sells more iPhones over time.
Does that mean any of those three, or the thousands of other U.S. companies will continue to grow earnings. Not individually. BlackBerry (whose corporate name was Research in Motion during its heyday) was a rapidly growing company until Apple destroyed its business model with a new phone.
In the future, ChatGPT may upend Google’s near monopolistic growth in search-related advertising leading to more change in market leadership. That is the nature of the creative destruction that has helped to continue aggregate earnings growth for U.S. companies.
earnings growth is the reason for the generally upward movement of stocks, seemingly without regard for debt ceiling debates and government closure.
Yet, a government shutdown could still happen. The longest government shutdown occurred over a 35-day stretch from December 22, 2018 to January 25, 2019.
Devastating to financial markets? Hardly. During that time the total return for the S&P 500 was 11.8 percent. And, over the period starting two weeks prior to that shutdown and ending two weeks after the re-opening the market rose 4.3 percent.
There are plenty of things to worry about in the market, like the investing risk of five companies accounting for nearly 25 percent of the market capitalization of the S&P 500, or that tax cuts that were enacted in 2017 will expire in 2025, sending tax rates much higher, but media coverage of the debt ceiling debate is adding to all the noise we hear and making the important longer-term signals hard to observe. It’s time to filter out the noise.
