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Debt Ceiling/Government Shutdown FAQ

Will the government go past the “X-date” on the debt ceiling and cause a government shutdown?

A government shutdown is not a new occurrence. In fact, it’s happened six times since 1990. So, with the political environment as polarized as we’ve seen in some time, it is possible that we could be headed for another shutdown.

Will the US default on its debt?

The chances of this happening are extremely low. The Federal Reserve can determine where it decides to shift funds and what debts it will pay and which they will not. Rather than skipping interest debt payments, the government will likely stop paying government salaries and, if extreme measures are necessary, postpone Social Security payments. Postpone is a keyword here. Payments will not be missed; postponed payments will be paid in full once the debt ceiling is raised. This measure would prompt politicians to quickly come up with a deal as no politician wants to risk their career by having constituents miss Social Security payments.  

What will a government shutdown mean for portfolios?

The best we can do is look historically at how the market has performed during shutdowns. As you can see in the chart below, the stock market has held up just fine; bonds have also done well even though it seems counterintuitive.  Remember, the US is still the cleanest dirty shirt in the world laundry basket, so Treasuries are still considered a safe haven in times of volatility. Every government shutdown and debt ceiling crisis is different.  What we would expect is higher than normal volatility until the government comes to its senses. 

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Will KWB make any portfolio changes in anticipation of a shutdown?

We could make small tweaks (2-5% changes) to hedge some risks, but we will not make large moves (5%+ changes). If you get out now and the government doesn’t shut down, the market could move significantly higher to the upside. If you get out and the government does shut down, how easy will it be to get back in? 

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We don’t have a crystal ball, so timing the government’s decision on a debt ceiling deal is close to impossible. Overall, the economy seems to be weakening, but employment remains strong. Since 70% of the economy is driven by the consumer, we continue to think that this year will be a good one for stocks, especially as inflation continues to fall.

Thank you for your conviction in KWB Wealth. If you have any other questions, please contact your advisor.  

~ Steve Gormley