In January, GW & Wade addressed the possibility of a government default in the event that Congress and the White House do not agree to increase the debt ceiling. President Joe Biden and House Speaker Kevin McCarthy met on Monday, May 22nd but could not reach an agreement on how to raise the U.S. government's $31.4 trillion debt ceiling¹. President Biden proposed a plan to cut the deficit by raising taxes on the wealthy and closing tax loopholes for oil and pharmaceutical industries. McCarthy rejected this plan, reaffirming his unwillingness to raise the nation’s borrowing limit without reducing federal spending in 2024. Both sides remain committed to striking a deal in the coming weeks.²

Treasury Secretary Yellen continues to warn that without an agreement to raise the debt ceiling, the United States would likely no longer be able to pay its bills by June 1st. Although the consequences of a default loom large, analysts and fund managers remain optimistic. In a survey released by Bank of America last week, 71% of 251 global fund managers surveyed feel that a resolution to the situation will be reached before the government has exhausted all options.³  Similarly, JPMorgan analysts said its speakers at the IMF/World Bank spring meetings assigned a 10-15% probability of default with outliers being close to 35%.⁴ This positive sentiment was reflected in the markets last Wednesday as the S&P 500 advanced sharply on the news of a likely deal.⁵ In the unlikely event of a default and material downgrade to the United States’ creditworthiness, we know from the 2011 debt ceiling standoff that traditional safe havens such as gold, the U.S. dollar, longer-dated treasuries, and other high quality core bonds provided some risk protection when volatility emerged. 

In the end, bipartisanship on the debt ceiling will likely prevail as it has over one hundred times since WWII.⁶ Following a meeting with President Biden last week, Speaker McCarthy optimistically stated, “I think at the end of the day, we do not have a debt default”. GW & Wade will continue to monitor this situation closely. Events like the current debate underscore our practice of seeking to construct thoughtful and diversified portfolios that perform regardless of current market conditions, whether foreseen or not. As a reminder, your GW & Wade Counselor is always available to walk you through what may be confusing or conflicting messages we may see in the media.

¹ Fresh round of debt ceiling talks kick off as default worries grow, Reuters, 5/22/23
² Yellen reiterates That the U.S. Could Run Out of Cash by June 1, New York Times, 5/15/23
³ Debt-Ceiling Tail hedges Are ‘Cheap Lottery Tickets,’ Bank of America Says, Bloomberg , 5/17/23
⁴ Observers see up to 35% chance of a U.S. default: JPMorgan, MarketWatch, 4/20/23
⁵ Stocks Advance on Hopes for US Debt Breakthrough, Bloomberg, 5/16/23
⁶ What happens if the US breaches the debt ceiling?, JPMorgan, 5/10/23

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The information provided above is the opinion of the author, general in nature and is not intended to represent specific investment or professional advice. No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from GW & Wade, LLC, which can only be provided through a formal advisory relationship.

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