Debt Ceiling Crisis: Stay Tuned for a Sequel

By Aradhana Kejriwal   |   October 24, 2013

The “drama” in Washington is no different from a blockbuster movie.  Despite the deal reached last week, the curtain has not come down on the film, as Congress may find itself in the same predicament in a few months’ time. The recent deal leaves the door open for another sequel as the compromise funds the government through mid-January and pushes any sovereign debt default out only until March, at which time the Treasury Department estimates it will have exhausted its extraordinary measures.  Wall Street Journal.

Did the recent debt ceiling crisis make you nervous? Did you think about timing the market as the crisis played out? Below we review the diverse market performance during the 2011 Debt Crisis and the most recent one.

2011 Debt Ceiling Crisis:  Following the 8/05/11 downgrade of the USA’s credit rating from AAA to AA+ as the debt ceiling deadline was being breached, the S&P 500 experienced a daily gain or loss of at least 1% (total return) in 60 of the subsequent 100 trading days, on average three out of every five days. That is more than three times the volatility exhibited by the stock index in 2012-2013.  2011 may have felt like a roller coaster; it ended up more like a merry go-round. The S&P 500 was up by more than 8% in the spring, down 12% during the summer (during the crisis) and finished the year virtually unchanged at 1257.60 (a drop of -0.003% for the year), the smallest annual market move for the S&P 500 since 1947.   BTN, MFS Investments.

2013 Debt Ceiling Sequel:  Since the beginning of the shutdown on October 1, the S&P 500 is up over 2.25%, as of the date of the deal signing.  Year to date, the S&P 500 is up 22.35% through October 23. Bloomberg.  We have not had any major market swings this year. Timing the market during this crisis would not have worked.

Markets and Your Portfolio:  The disparity in the market’s performance once again demonstrates that betting on the short-term performance of the market is rarely a winning strategy. Investors can inflict great harm on themselves by reacting to the news and attempting to time the markets.

We recommend investors remain resolute in the face of an always-uncertain future. Being a disciplined investor is not always easy, but over time, disciplined investing has demonstrated the ability to generate wealth, while market timing has proved to be a costly exercise. While we are rooting for Congress to act responsibly, the best prescription for you may be to review your finances and your portfolio and match your goals and your needs.  Ultimately, only you can determine the fate of your portfolio.


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