Money
This one chart shows the stock market risk of going down to the wire on a debt ceiling deal
Investors are increasingly on edge as debt ceiling talks have yet to produce a deal, with just seven days until the Treasury’s June 1 default deadline. Going down to the wire in 2011 was disastrous for the stock market — something nobody wants to repeat this time around. We put together a chart that highlights the risk of traveling that path again. But first, some background: U.S. Treasury Secretary Janet Yellen has called out one week from Thursday as the target date, or X-date, for default, while Goldman Sachs’ chief political economist thinks there could be another week, pegging June 8 or 9 as the X-date. Either way, this game of chicken with the nation’s debt and the uncertainty it brings isn’t good for anyone. We often say that investors like Washington gridlock because it makes for a predictable environment. What we don’t like is dysfunction, and we’re seeing it play out in real-time. However, we do think a deal will eventually be reached because the alternative is almost unthinkable: an unprecedented U.S. government default. Unfortunately (or perhaps, fortunately), there’s a recent historical analogue for Washington and Wall Street to contemplate. The 2011 debt ceiling standoff led to about a 17% decline in the S & P 500 from late-July to mid-August 2011. The X-date back then was Aug. 2, and a deal was finally struck on July 31 — about as close to the deadline as you can get. So close, in fact, that on Aug. 5, 2011 the Standard & Poor’s credit rating agency issued its first-ever downgrade of U.S. sovereign debt — from the highest AAA to AA+. The risks of the current dance turning out like 2011 — especially with Fitch now placing the United States’ AAA rating on a negative rating watch — are plain to see looking at this one chart. To illustrate this cautionary tale, we lined up the X-dates in 2011 and 2023 and counted back 25 days and counted forward 30 days. The blue line represents the S & P 500’s daily percent changes during that period. The orange line represents the S & P 500 in 2023, through Tuesday’s close. You can see what kind of a rough ride we’re in for if the index were to follow the 2011 pattern. We will likely come through this current debt ceiling showdown with a deal that neither party is too fond of, which is exactly how compromise happens. However, if it plays out as it did in 2011, then we are likely to see lower levels in the market before seeing higher ones. Even if a deal is reached, we could still see a negative impact on borrowing costs and interest rates resulting from the drama we are currently seeing unfold. Bottom line Nobody can say exactly how this will all play out. House Speaker Kevin McCarthy and the Republicans want spending cuts attached to any debt ceiling increase. President Joe Biden and the Democrats want a so-called clean debt ceiling increase before engaging in spending talks. Both sides have said that default is not an option. However, given the growing uncertainty and increasing market volatility, we see no reason to be heroes or make a statement buy. As a result, the best approach is to stay the course, seeking out opportunities in the beaten-down stocks of great companies, while keeping cash levels relatively high. We’re currently at about 10% for Jim Cramer’s Charitable Trust, the stocks we use as the Club portfolio. For an overview of how our holdings faired in 2011, members can review our prior alert, here , which does point out that after the dust settled back then the S & P 500 finished about flat on the year. That served as a reminder that for the brave the 2011 debt ceiling crisis bottom was a great buying opportunity. We hope there are going to be plenty of opportunities in the coming weeks as this all likely gets resolved, especially when we consider that most non-AI stocks have been overlooked this year, something we wrote about Wednesday (and that was even before Club stock Nvidia (NVDA) soared the next day after a blowout quarter and guidance raise.) (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
US House Speaker Kevin McCarthy, a Republican from California, at the New York Stock Exchange (NYSE) in New York, US, on Monday, April 17, 2023.
Kevin McCarthy | Bloomberg | Getty Images
Investors are increasingly on edge as debt ceiling talks have yet to produce a deal, with just seven days until the Treasury’s June 1 default deadline. Going down to the wire in 2011 was disastrous for the stock market — something nobody wants to repeat this time around. We put together a chart that highlights the risk of traveling that path again.
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