The S&P 500 in the US hit a nine-month high last week, and it’s rallied almost 10 per cent this year.
Meanwhile, volatility has been tracking at the lowest levels since July 2021, almost two years ago.
The US actually hit its debt ceiling back in January. Since then, it’s been using “extraordinary measures” to keep things running, but time is running out.
While it sounds ominous, raising the debt ceiling is a regular occurrence in the US.
Since 1917, there’s been a statutory limit on the amount of debt the Government is allowed to have, and total debt has increased under every president since Herbert Hoover in the 1930s.
The economy has grown steadily over that period, while over time, inflation ensures these borrowing limits (which are set in dollar terms) must also be periodically increased.
That’s not to say the US isn’t a highly indebted nation. It is, and debt levels have been rising steadily in recent decades.
However, this needs to be considered in relation to the size of the economy, rather than in dollar terms.
Anyway, the US debt ceiling has been increased 78 times since 1960.
In recent decades it’s become an increasingly political issue, as the major parties use it to try to gain leverage over each other.
That could be one reason markets have been relatively relaxed. The brinkmanship is expected, and investors have grown accustomed to 11th-hour agreements.
However, taking it lightly hasn’t always paid off.
Debt ceiling negotiations got ugly in 1995 during Bill Clinton’s first term, then in 2011 and 2013 under Barack Obama.
While it was eventually resolved in those examples, there was significant disruption as some government services were shut down temporarily and financial markets reacted badly.
The 2011 episode even saw the US lose its prized AAA credit rating from Standard & Poor’s, which it still hasn’t regained.
Some analysts have compared that period to today.
The US share market went similarly sideways in the lead-up to the 2011 deadline, hopeful an agreement would be reached well in advance.
It wasn’t, and US shares fell 18 per cent in the following two months before recouping those losses early the following year.
During that period, the local share market declined 5 per cent, the NZ dollar slumped more than 10 per cent and oil prices tumbled more than 20 per cent.
Investors flocked to safe-haven assets, with the US 10-year Treasury yield falling sharply and gold prices surging almost 20 per cent to over US$1900 per ounce.
Gold quickly fell back to earth in the following weeks, and it didn’t reach those heady levels again until the pandemic in 2020.
Back in the present day, there are a few other reasons US investors are in better spirits.
The March quarter earnings season was solid, inflation is headed lower, and it looks like the Federal Reserve might have raised US interest rates for the last time.
If the debt ceiling debate can be resolved without fanfare, this could add to the positive sentiment.
However, there isn’t much room (or time) for error, and the calm will quickly turn to turbulence quickly if the politicians misjudge the situation.
Mark Lister is Investment Director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision, Craigs Investment Partners recommends you contact an investment adviser.
