| To Panic or Not to Panic? | |||||||
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| It’s baaaaack. The debt ceiling, that is… You’ve likely been seeing a lot of headlines about the debt ceiling these past few days. We actually hit the ceiling back in March, but nobody seems to have noticed until recently. That’s because the president just stated that he’d force the government into a shutdown if Congress doesn’t allocate $1.6 billion to build his wall along the Mexican-U.S. border. People are saying he’s backing himself into a corner. They’re also saying that if an agreement isn’t reached to raise the ceiling, the U.S. will default on its loans and the country will be plunged into another recession. USC law professor Edward Kleinbard went as far as saying, “Sometime in October, the United States is likely to default on its obligation to pay its bills as they come due, having failed to raise the federal debt ceiling. This will cost the Treasury tens of billions of dollars every year for decades to come in higher interest charges and probably trigger a severe recession.” There’s little to no chance the U.S. will default on its debts. That just doesn’t happen. The government may shut down for a bit again. The accounts may be stretched. But, in the end, we’ll pay our obligations. But everyone wants to talk about how terrible it’ll be if Congress and the president can’t come to an agreement and extend our credit limit.Bad News Sells Papers That’s all hype, though. I mean, it’s easier to get clicks or sell papers if you’re pushing panic. “Massive Recession Coming” gets a lot more attention than “The Market Probably Won’t React.” But it’s the second headline that’s most accurate. Either prices drop early and recover slowly, or they don’t really drop at all. Growth will just be slower than usual. You see, the stock market has an uncanny knack of pricing in predictable events long before they happen. And the debt ceiling debates are oh so predictable. Pretty much all highly politicized and publicized events are already priced into stocks long before they come to fruition. It’s the things that are unpredictable — wars, natural disasters, assassinations, stuff like that — that send the market spiraling out of control. They’re often called Black Swan events. And this is not one of them. Numbers Don’t Lie But, if you don’t believe me, just look at the recent history of debt ceiling “crises.” Two have led to government shutdowns, but none have led to a market collapse as the fear-mongers predicted then and are predicting now. Debt Ceiling “Crisis” of 1995 Back in 1995, during Bill Clinton’s presidency, there was a so-called crisis with the debt ceiling. It all started at the midterm elections in November of the preceding year… We were running up against the debt ceiling and a new Republican Congress had just been elected. They were refusing to work with the president to raise debt limits to get legislation they wanted passed. For nearly a year, the two factions battled back and forth. And finally, in November of 1995, the government shut down. It only lasted a few days, but still, it shut down. But that only gave them a little more time to argue. By December of the same year, they still hadn’t come to an agreement, and the government shut down again. This time it lasted about three weeks. Finally, in early January of 1996, an agreement was made, the ceiling was raised, and employees returned to work. So, what did the market do while all this was going on? Well, it went up. Just more slowly than usual… Between the elections and the first shutdown, the market gained an average of 0.10% a day for a total gain of 27.29%. Then, during the first shutdown, it went up a little bit more — 0.77%. In the second (longer) one, it continued to rise, albeit slowly. When the workers returned to their desks, it was up another 0.13%.
If you factor in the trading days between the two shutdowns, the market gained a total of 4.42% while it was supposed to be in a panic about the debt limit. And overall between the elections and the compromise, it rose 30.88%. Doesn’t sound like a crash to me.
In the run-up to the shutdown, from January to the end of September, it gained 15.22% — an average daily gain of 0.08% (about the same as in the 1995 “crisis”). During the shutdown, it went up also — 2.25% to be exact. And after the compromise was reached, it accelerated to an average daily gain of 0.18% — again, a little more than double the slow growth during the debacle. |
