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Time is running out for the Biden administration and Congress to reach a deal to raise the debt ceiling. Treasury Secretary Janet Yellen has said the U.S. could default as soon as June 1 if Congress doesn’t take action.
Aaron Brachman, managing director and wealth manager of the Washington Wealth Group team at Stewart Partners, says his clients are asking questions about the debt ceiling standoff.
“They’re worried about what might happen to the economy if the debt ceiling is not raised,” says Brachman.
The last time a hyper-partisan debate stalled efforts to raise the debt limit was in 2011. The delay damaged the economy, panicked the stock market, nearly pushed the country into default and led S&P Global to downgrade the U.S. sovereign credit rating.
Let’s take a closer look at different considerations for investors who want to know the best way to position their investment portfolios at this delicate moment.
Would a Debt Ceiling Crisis Be Bad for Markets?
First and foremost, it’s worth bearing in mind that the most likely outcome is a last-minute deal to raise the debt ceiling. But as the U.S. gets closer and closer to the line, you may be wondering what you should be doing with your investments to avoid potentially getting hurt.
“A broad spectrum default by the U.S. Treasury would trigger financial armageddon,” says Robert Michaud, chief investment officer at New Frontier Advisors. “This would mean a systemic drop in wealth of all individuals.”
You have options to play the debt ceiling standoff, say leading financial advisors. While the threat to markets and the economy is imminent, some stocks and market sectors are poised to benefit from economic crosscurrents right now. Others stand to benefit once the crisis is resolved.
“Imagine when stocks begin to break to new highs,” says Paul Schatz, president of Heritage Capital and treasurer of the National Association of Active Investment Managers (NAAIM). “You could see one of the all-time great short squeezes as bears throw in the towel and everyone plays catch up.”
A short squeeze happens when traders get stuck on the wrong side of a short selling play. They were betting that stocks would decline in price, and they get squeezed out when prices rise instead.
The risk of course is that the inevitable rally takes years rather than days or weeks to arrive.
Ways Investors Can Take Advantage of the Debt Ceiling Crisis
If you are a glass-half-full investor who’s willing to seize opportunities no matter what’s happening in the stock market, here are a few good ways to play the debt ceiling crisis, shared by the financial professionals we interviewed.
Let’s start with defense stocks. Chris McMahon, president of MFA Wealth and CEO of Aquinas Wealth Advisors, both in Pittsburgh, sees defense contractors benefitting from a deal to raise the debt limit.
“Defense companies stand to benefit as the government may need to increase defense spending as a result of the debt ceiling issues.”
We would note that the iShares U.S. Aerospace & Defense ETF (ITA) is the largest defense contractor exchange-traded fund. This $5.7 billion ETF offers targeted exposure to U.S. companies that manufacture commercial and military aircraft as well as other defense hardware. ITA owns stocks Raytheon Technologies (RTX) and Lockheed Martin (LMT).
The fund’s annual expense ratio is a relatively low 0.39%. Its total return over the 12 months ended May 12 was 15.54%—compare that to the 6.76% return for the S&P 500 Index over the same period.
Still, in the past month the fund is down 4.62% versus a gain of 0.91% for the big-cap bogey. Investors may be concerned about companies that depend largely on the U.S. government for revenues.
Should You Bet on Banks?
McMahon also believes that financial services stocks look like another sector that’s poised to be a potential beneficiary of a debt ceiling deal.
“The financial sector stands to benefit from debt ceiling issues because a rising debt limit could lead to increased borrowing by the government, which could lead to increased profits for banks and other financial institutions,” he says.
As for some investors’ concerns about regional banks, McMahon agrees. The lenders that are best positioned to benefit from increased government borrowing are mainly large, well-established national banks, he says. He added, “Regional banks hold a significant amount of T-Bills. And we have made the decision to divest from those banks in our portfolio.”
The Financial Select Sector SPDR Fund (XLF), a heavyweight ETF with $28.8 billion in total net assets, caught our eye. XLF is part of the State Street Global Advisors’ stable of funds. After a very rough patch for the banks, XLF’s total return in the past 12 months is down 1.44%.
U.S. Treasury Securities May Be Worth a Look
Still, financial services remain fraught with risk. For another advisor we spoke with, this means steering clear of banks.
“Banks hold significant amounts of U.S. Treasury bonds and other government debt,” says Derek Miser, investment advisor and CEO at Miser Wealth Partners. “A default could cause a sharp decline in the value of these assets.”
Declines of a similar nature brought down regional banks Silicon Valley Bank, Signature Bank and First Republic. But Michaud points to the silver lining offered by U.S. Treasury securities.
“Treasurys paradoxically can perform well, since even when faced with potential default, they remain the relatively safest asset,” he said.
Concurring, Brachman says that “Treasurys will be the safe haven of last resort.”
If you want to play long-term Treasurys, consider the iShares 20+ Year Treasury Bond ETF (TLT). With $36 billion in assets, it is the jumbo of its space. Its expense ratio is a low 0.15%. Its dividend yield is a decent 2.70%.
Just keep in mind that TLT’s one-year return of negative 8.53% reflects the beating that long bonds have taken while the Federal Reserve has been raising interest rates.
Gold: The Traditional Safe Haven
Precious metals like gold may benefit from a U.S. default, says Miser. There are plenty of gold stocks and funds you can choose from to invest in this traditional safe haven investment asset.
“Gold and other precious metals have traditionally been viewed as safe haven investments during times of economic turmoil,” he says. “If the debt ceiling is not raised and the government defaults on its debt obligations, investors may turn to gold and other precious metals to protect their wealth.”
The largest precious metals ETF is SPDR Gold Shares (GLD), with $60.7 billion in net assets. Its annual expense ratio is 0.40%. Dividend yield is zero, however, as gold notoriously lacks much in the way of cash flow.
Nevertheless, the fund’s total return ranks in the top 10% of its Morningstar commodities fund peer group over the past 15 years and the top 13% over the past 10 years.
Take Refuge With Utilities
Utilities stocks are another traditional safe haven. When the economy stumbles, consumers don’t turn off their lights, stop watching television and unplug the refrigerator.
Michaud likes utilities in a scenario where economic volatility increases as Congress prolongs the debt ceiling crisis by failing to suspend or raise the debt limit.
The Utilities Select Sector SPDR ETF (XLU) is the big candle in the utilities ETF space, with its $16.2 billion size. It has a very low glare annual expense ratio of 0.10%. Its dividend yield is a high wattage 3.01%. Its return over the past year is negative 1.63%. But its 10-year average annual gain is 9.00%. And the fund outperformed 93% of its peers over the past 10 years.
Likewise, Sam Stovall, chief investment strategist for CFRA Research, says utilities is one of the sectors he likes amid “concern over the possible debt default, combined with the market’s traditionally poor seasonal performance from May through October.”
Stovall likes Edison International (EIX), an S&P 500 stock with a five-star strong buy recommendation from CFRA. Currently trading around $71, Stovall says it can hit $88 within six to 12 months.
FAQs
How do I prepare for debt default? ›
- Build an emergency fund. ...
- Reduce debt. ...
- Wait to buy a home. ...
- Diversify your investments but don't overdo it. ...
- Review and adjust financial plans.
The precious metal is often not affected by inflation or fluctuations in currency values, making it a go-to option for investors looking to safeguard their assets. If the United States defaults on its debt, gold may prove to be a wise investment choice."
What happens if the US hits the debt ceiling? ›Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a dropoff in consumer confidence that could shock the United States' financial market and tip its economy—and the world's—into immediate recession.
What happens if debt ceiling isn't raised? ›If the debt ceiling isn't raised in time, Treasury and the White House will have to make difficult decisions about which bills to pay with the funds that are available. The US has never missed making payments on its bills before. In fact, in the last 45 years, Congress has adjusted the debt ceiling over 60 times.
What are the five recommended steps for getting out of debt? ›- Set a goal. All successful projects start with a clear goal. ...
- Make a list of your current debts. In order to get rid of your debt, you need an accurate and complete list of the debt you have. ...
- Gather additional information on debt repayment. ...
- Make a plan. ...
- Stick with your plan.
- List everything you owe.
- Decide how much you can pay each month.
- Reduce your interest rates.
- Use a debt repayment strategy.
- Be diligent moving forward.
A default would potentially reduce payments that keep millions of households afloat, as well as payments to states and providers for health care for elderly and low-income Americans.
What happens if the US defaults on their debt? ›So if the U.S. cannot pay its creditors, interest rates on U.S. debt would go up, creating a cascade of higher interest rates. So mortgage rates, credit card rates, car loan rates. All would become more expensive. Finally, there is a real concern about the economy — that a default could spark a recession.
How to protect your money if the US defaults on its debt? ›That means tamping down on excess spending, making a budget, and shoring up emergency savings to cover at least three months of living expenses. Since a debt default would likely send interest rates soaring, any credit card debt you're saddled with may soon cost you more.
Who owns the most US debt? ›Domestic Holders of Federal Debt
The Federal Reserve, which purchases and sells Treasury securities as a means to influence federal interest rates and the nation's money supply, is the largest holder of such debt.
How much debt is the US in 2023? ›
The deficit is projected to fall to $1,154 billion billion in 2023, and debt held by the public is projected to grow to $26,033 billion, but fall as a percent of GDP, to 101.8 percent. After 2023, the deficit is projected to roughly stabilize at around 5 percent as a percent of GDP.
When was the last time the debt ceiling was raised in the US? ›Debt ceiling increases under President George W. Bush
While George W. Bush was President, both Republicans and Democrats controlled the House and the Senate at various points during his term. Congress increased the debt ceiling eight times in 2002, 2003, 2004, 2006, 2007, and twice in 2008.
Rising debt means fewer economic opportunities for Americans. Rising debt reduces business investment and slows economic growth. It also increases expectations of higher rates of inflation and erosion of confidence in the U.S. dollar.
What would a government shutdown mean? ›Government shutdowns, in United States politics, refer to a funding gap period that causes a full or partial shutdown of federal government operations and agencies. They are caused when there is a failure to pass a funding legislation to finance the government for its next fiscal year or a temporary funding measure.
What's in the debt ceiling deal? ›The deal would suspend the $31.4 trillion debt ceiling until January of 2025, allowing the U.S. government to pay its bills. In exchange, non-defense discretionary spending would be capped at current year levels in 2024 and increased by only 1% in 2025.
What is the best and fastest way to get out of debt? ›Pay off your most expensive loan first.
Then, continue paying down debts with the next highest interest rates to save on your overall cost. This is sometimes referred to as the “avalanche method” of paying down debt.
- Maximize Your Liquid Savings.
- Make a Budget.
- Minimize Your Monthly Bills.
- Closely Manage Your Bills.
- Non-Cash Assets and Maximize Their Value.
- Pay Down Credit Card Debt.
- Get a Better Credit Card Deal.
- Earn Extra Cash.
- Find a credit counseling agency with a good Debt Management Plan.
- Look into a Credit Card Debt Forgiveness Plan.
- Pick one of the many debt-reduction methods and “Do It Yourself”
- File for bankruptcy.
- Develop a budget to track your expenses. ...
- Don't take on more debt. ...
- Pay your bills in full and on time. ...
- Check your bills carefully. ...
- Pay off your high-interest debts first. ...
- Reduce the number of credit cards you have. ...
- Look for the best interest rates when consolidating your debts.
- Determine Your Net Worth.
- Set Financial Goals.
- Track Your Spending.
- Create a Budget.
What are the six steps of getting out of debt? ›
- Step 1: Make a budget. Making a budget is the most important step in taking control of your finances. ...
- Step 2: Check your credit health. ...
- Step 3: Create a plan. ...
- Step 4: Take control and take action. ...
- Step 5: Stretch your dollar. ...
- Step 6: Planning ahead.
The stock market will certainly take a hit if the U.S. defaults on its debt. At moments, the losses could seem significant to anyone with investments or retirement accounts. But for those with diversified portfolios who aren't nearing retirement, investment experts advise that you stay the course.
What happens if the US does not raise the debt? ›If the debt ceiling binds, and the U.S. Treasury does not have the ability to pay its obligations, the negative economic effects would quickly mount and risk triggering a deep recession. The economic effects of such an unprecedented event would surely be negative.
Does the US ever pay off its debt? ›On January 8, 1835, president Andrew Jackson paid off the entire national debt, the only time in U.S. history that has been accomplished.
Does the US owe most of its debt to itself? ›Many people believe that much of the U.S. national debt is owed to foreign countries like China and Japan, but the truth is that most of it is owed to Social Security and pension funds right here in the U.S.
Does debt go away after 7 years in USA? ›A debt doesn't generally expire or disappear until its paid, but in many states, there may be a time limit on how long creditors or debt collectors can use legal action to collect a debt.
Can the US government print all the money that it wants to get out of debt? ›The Fed tries to influence the supply of money in the economy to promote noninflationary growth. Unless there is an increase in economic activity commensurate with the amount of money that is created, printing money to pay off the debt would make inflation worse.
Which country owes the US the most money? ›Over the past 20 years, Japan and China have owned more US Treasuries than any other foreign nation. Between 2000 and 2022, Japan grew from owning $534 billion to just over $1 trillion, while China's ownership grew from $101 billion to $855 billion.
What is the main cause of US debt? ›What Causes the National Debt? The federal government adds to the national debt whenever it spends more than it receives in tax revenue. This causes a budget deficit, but it's necessary to help expand the economy. This is known as expansionary fiscal policy.
What year was the US not in debt? ›As a result, the U.S. actually did become debt free, for the first and only time, at the beginning of 1835 and stayed that way until 1837. It remains the only time that a major country was without debt.
Which countries are not in debt? ›
- Brunei. 3.2%
- Afghanistan. 7.8%
- Kuwait. 11.5%
- Democratic Republic of Congo. 15.2%
- Eswatini. 15.5%
- Palestine. 16.4%
- Russia. 17.8%
The federal government borrows money from the public by issuing securities—bills, notes, and bonds—through the Treasury. Treasury securities are attractive to investors because they are: Backed by the full faith and credit of the United States government.
When did the US get in so much debt? ›The Great Recession
Debt in the new millennium exploded with the September 11, 2001 terrorist attacks. Spending on homeland security and the Iraq War increased and the economy stalled. Also, a large portion of the federal debt stemmed from money borrowed by the government from Social Security and Medicare.
Use. Several countries have debt limitation laws in place. Only Denmark and the United States have a debt ceiling that is set at an absolute amount rather than a percentage of GDP.
What is the current U.S. debt? ›What is the U.S. National Debt amount? The current U.S. debt is $31,462,154,854,903 as of May 23, 2023.
What should I do if I have too much debt? ›- Analyze your situation. ...
- Consider bankruptcy. ...
- Consider going to a credit counseling service. ...
- Prioritize the debt you need to pay. ...
- Talk to your credit card issuers. ...
- Pay off the debt with the higher interest first. ...
- Or – pay off smaller debts first. ...
- Transfer your credit card balance.
Key Takeaways. Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
How do you solve too much debt? ›- Develop a budget to track your expenses. ...
- Don't take on more debt. ...
- Pay your bills in full and on time. ...
- Check your bills carefully. ...
- Pay off your high-interest debts first. ...
- Reduce the number of credit cards you have. ...
- Look for the best interest rates when consolidating your debts.
Will I continue to receive my Social Security and SSI checks? During a government shutdown, recipients will continue to receive their Social Security and SSI checks.
What happens if the debt ceiling isn't raised? ›If the debt ceiling isn't raised in time, Treasury and the White House will have to make difficult decisions about which bills to pay with the funds that are available. The US has never missed making payments on its bills before. In fact, in the last 45 years, Congress has adjusted the debt ceiling over 60 times.
How much do they want to raise the debt ceiling? ›
Bipartisan Budget Act of 2019: This bill suspended the debt limit through July 31, 2021, and provided for an automatic “catch up” to account for the borrowing up to that point. That will effectively raise the debt limit by $6.5 trillion to its anticipated level of approximately $28.5 trillion.
How do you overcome a default loan? ›Complete rehabilitation by making on-time payments after the payment suspension ends. You need to make nine on-time monthly payments (or payment credits) in order to successfully complete loan rehabilitation. During the COVID-19 emergency relief period, paused payments count toward loan rehabilitation.
Should I pay off a default? ›Technically, paying a default won't have a direct impact or improve your credit score. Over time, however, your score will gradually improve as the default gets older. Plus, some lenders will only lend once the defaults are cleared. Therefore, paying the default as quickly as possible is in your best interest.
What happens if you don't pay a loan and it goes into default? ›When you stop paying a personal loan, it could result in your account going into default, the balance being sent to collections, legal action against you and a significant drop in your credit score. If money is tight and you're wondering how you'll keep making your personal loan payments, here's what you should know.
How long do you have to pay a default? ›How long does a default stay on your credit file? A default will stay on your credit file for six years from the date of default, regardless of whether you pay off the debt. But the good news is that once your default is removed, the lender won't be able to re-register it, even if you still owe them money.
What happens if the US defaults on its debt? ›U.S. debt, long viewed as ultra-safe
A default could shatter the $24 trillion market for Treasury debt, cause financial markets to freeze up and ignite an international crisis.
Loan Recovery Through Judicial Process
Loan defaulting by itself is not a crime and defaulters cannot be arrested. But if a defaulter has not repaid a loan despite being liable for the same, the lender can file a case in civil court against the borrower.
One way that lenders protect themselves is by writing into the loan terms that the borrower can extend this term for an additional six months to a year for a fee to the borrower (usually 1%). Lenders also offer to waive the exit fee when a borrower chooses to refinance the loan with the existing lender.
Is it true that after 7 years your credit is clear? ›Most negative items should automatically fall off your credit reports seven years from the date of your first missed payment, at which point your credit scores may start rising. But if you are otherwise using credit responsibly, your score may rebound to its starting point within three months to six years.
What happens after 7 years of not paying debt? ›Although the unpaid debt will go on your credit report and cause a negative impact to your score, the good news is that it won't last forever. Debt after 7 years, unpaid credit card debt falls off of credit reports. The debt doesn't vanish completely, but it'll no longer impact your credit score.
Is it better to save some money or payoff debt? ›
Our recommendation is to prioritize paying down significant debt while making small contributions to your savings. Once you've paid off your debt, you can then more aggressively build your savings by contributing the full amount you were previously paying each month toward debt.