Debt Ceiling Drama

Jul 11, 2023

Earlier this year, we started hearing rumors of a potential default that could occur by late Spring if the United States government didn't lift the debt ceiling. Once May arrived, we started to hear these warnings more frequently.

Halfway through May, the headlines came daily. We would get several breaking news updates each day as we neared the end of the month. The press coverage became relentless, and the debt ceiling standoff was front and center of the attention of Americans.

While the media was worrying about it and convincing everyone else around the world to be concerned, do you know who wasn't all that concerned? The stock market. There is an indicator called the Vix that measures stock market volatility. The measure is complex, but in layman's terms, it is a fear gauge providing a numerical answer to "How scared is the stock market?"

The long-term average of the Vix is about 19. For perspective, Vix entered 2023 with a value of about 21. During the banking crisis in March, it peaked close to 27.

On May 24th, the Vix hit the highest level for the month. It was 20. That's a little above average, but not by much.

There was some worry in the market, but not much. Then on May 27th, everyone breathed a sigh of relief as news surfaced that President Biden and House Speaker McCarthy had reached a deal. This deal, which would suspend the ceiling for two years, passed the House, next to the Senate, and was finally signed by Biden on June 3rd.

Ultimately, we had two days to spare. June 5th was the final deadline for having a bill passed. Were we two days away from disaster? Literally, yes, but not realistically. If there were a reasonable chance of default, the stock market would have been much more volatile, with significant losses. The stock market had it right the whole time. There would be a deal, and it would be signed shortly before the deadline. Whether the deadline was June 1st or June 5th, a deal would be reached.

What should be the takeaway for investors? It was not a good decision for those that considered cashing out of risky assets. Making drastic moves in a portfolio because of an unlikely event often misses the mark. Portfolio moves should be based more on long-term outlooks and less on short-term unlikely events.

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The material has been gathered from sources believed to be reliable, however Bedel Financial Consulting, Inc. cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. To determine which investments or planning strategies may be appropriate for you, consult your financial advisor or other industry professional prior to investing or implementing a planning strategy. This article is not intended to provide investment, tax or legal advice, and nothing contained in these materials should be taken as such. Investment Advisory services are offered through Bedel Financial Consulting, Inc. Advisory services are only offered where Bedel Financial Consulting, Inc. and its representatives are properly licensed or exempt from licensure. No advice may be rendered unless a client agreement is in place.

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