In wake of the failed attempt to pass the American Health Care Act (ACHA), concerns around the Trump administration and Congress’s ability to collaborate on enacting new legislation are rising. While many commentators are focused on the likely next agenda item of reforming the tax code, the U.S. has quietly reached its debt ceiling and the Treasury Department has begun to enact extraordinary measures to avoid default.
While it could be months before Congress focuses on this issue, it appears possible that another debt ceiling showdown is in the cards.1 In anticipation of this possible event, we looked at the performance of various asset classes for the one month period preceding the last two contentious debt ceiling negotiations in 2011 and 2013.
Debt Ceiling
As depicted in the chart above, equity asset classes responded quite differently in 2011 and 2013. Stocks around the globe sold off in 2011 as the macro backdrop was quite negative. At the time, S&P announced it was considering a downgrade of the U.S.’s credit rating and Europe was in the midst of its own debt crisis due to the unsustainable debts of European periphery countries. By contrast, the U.S. and European economies were on the mend by 2013, and the S&P 500 went on to have its best performance in the last 20 years.
The bond and currency markets showed more consistent reactions in both debt ceiling crises. Treasury and corporate bonds with maturities longer than one year rallied as investors fled to lower risk asset classes and believed that longer term obligations would still be met. The dollar mildly declined in both instances. Not pictured in the chart above (due to scale) are shorter term treasuries, like the 3-month treasury bill which saw yields skyrocket up 800% in 2011 and 900% in 2013 as fears over missed repayments soared.2
While the Trump administration has consistently defied conventional wisdom, and the diverging examples of the last two debt ceiling standoffs suggest an uncertain path forward, the current fundamentals of the U.S. economy more closely resemble 2013 than 2011.
Article by Jay Jacobs, CFA – Global X
1. The US Congressional Budget Office believes the extraordinary measures taken by the Treasury Department should avoid a default until fall 2017. https://www.cbo.gov/sites/default/files/115th-congress-2017-2018/reports/52465-federaldebtlimit.pdf
2. Source: Bloomberg data on 3 month T-bill yields, 2017.
Definitions:
Asset Class | Index Name | Definition |
US Equities | S&P 500 | The S&P 500 is an index of 500 stocks chosen by factors such as market size, liquidity and industry grouping. The Index is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe. |
International Equities | MSCI EAFE Index | The MSCI EAFE Index is an equity index which captures large and mid cap representation across Developed Markets countries around the world, excluding the US and Canada. The index covers approximately 85% of the free float-adjusted market capitalization in each country. |
Emerging Market Equities | MSCI Emerging Markets Index | The MSCI Emerging Markets Index captures large and mid cap representation across 23 Emerging Markets (EM) countries. |
1-3 Year US Treasuries | Bloomberg US Treasury Bond Index 1-3 Year | The Bloomberg US Treasury Bond Index 1-3 Year is a rules-based, market-value weighted index engineered to measure the performance and characteristics of fixed rate coupon U.S. Treasuries which have a maturity greater than 12 months and less than 36 months. |
10 Year US Treasuries | Bloomberg US Treasury Bond Index 10+ Year | The Bloomberg US Treasury Bond Index 10+ Year is a rules-based, market-value weighted index engineered to measure the performance and characteristics of fixed rate coupon U.S. Treasuries which have a maturity greater than 10 years. |
US Aggregate Bond Index | Bloomberg Barclays US Aggregate Total Return Value Unhedged Index | The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. |
US Dollar | US Dollar Index | The US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of US trade partners’ currencies. |
Euro | N/A | The spot change between the Euro and USD |
Yen | N/A | The spot change between the
JPY and USD |
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only.
Past performance does not guarantee future results.
U.S. Treasury securities are considered to be of high credit quality and are backed by the full faith and credit of the U.S. government. U.S. Treasury securities, if held to maturity, guarantee a return of principal while no other securities mentioned in this material offer such a guarantee.
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