This week, investors took comfort from the encouraging signs regarding the negotiations in the States to raise their debt ceiling, with US President Joe Biden saying he was “confident” of reaching an agreement before the deadline.
For context, the debt ceiling was established in 1917 to give the US Treasury Department flexibility in managing the nation’s finances and was originally designed as a mechanism to promote fiscal prudence. It effectively limits the amount of money the US government can borrow to pay for services, such as social security, Medicare, and the military.
It has, however, in recent years become a political pawn (with both sides guilty) in the ongoing battles between political parties. Over that period, it has frequently been used as leverage to promote policy objectives, leading to brinkmanship and uncertainty (like we are currently seeing) within financial markets.
US Treasury Secretary Janet Yellen stressed this week the importance of getting a deal sorted, saying, “It’s Congress’s job to do this. If they fail to do it, we will have an economic and financial catastrophe that will be of our own making”. While the economic consequences of it not being raised would be dire (essentially the US would default on its loan obligations), history suggests that a deal will be made in the weeks ahead. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents.
As long-term investors, we focus on fundamental factors like economic growth, corporate earnings, and interest rates that typically drive market returns. Attempting to time the market based on political developments is notoriously challenging. Rather than trying to anticipate short-term market fluctuations, we feel long-term investors stand to benefit from maintaining a consistent investment strategy.
John Naylor, Chartered FCSI – Head of Investment Committee