Unless you’ve been living under a rock recently, chances are you’ve read – or at least heard – about something called the US debt ceiling.
But what does it mean? And, perhaps more importantly, what does it mean for your Plans?
What is the US debt ceiling?
In simple terms, a debt ceiling is another way of saying debt limit. Within the context of what’s been happening stateside recently – it refers to the maximum amount of debt the US government can take on. Created by Congress in 1917, the US debt ceiling currently stands at $31.4tn [1] (£25tn).
Ok, so what’s all the fuss been about?
Unless the ceiling was raised or suspended by June 5th, 2023, the US government would have had to start defaulting on their debt, creating a significant impact on global economies.
Despite Congress raising the limit 78 times since 1960 – most recently in 2021 – opposition to doing so this time around has led to strained negotiations between Republicans and Democrats, turning what is usually a formality into an adversity.
With days to spare, however, both the US House of Representatives and Senate voted in favour of suspending the ceiling until after the 2024 presidential election, avoiding the dreaded default.
How does the US debt ceiling affect Wealthify Plans?
The effect of the debt ceiling uncertainty on our Plans is hard to separate from everything else that is currently impacting markets and asset classes. Overall, however, it created greater risk aversion to both bonds and shares for a period when a deal was up in the air.
Now that a debt deal has been signed, many of the market movements have largely reversed, and will continue to reverse as the final seal of approval is put on the debt bill by the Senate.
While Wealthify Plans may have incurred some volatility, the pathway from uncertainty to deal for the US debt ceiling, means that the effect will be limited over the long-term.
Below is how we would summarise the impact on Plans:
Shares: Debt ceiling headlines caused a drop in consumer sentiment. Consumption is a key driver of the economy, and a slip in confidence has affected shares that are particularly sensitive to consumer shifts, such as car makers. While our Plans will have exposure to these sectors, our diversified approach limits the impact on our Plans’ shares, which are already recovering from the uncertainty.
Bonds: As a result of concerns over a US government default, yields on US debt went up, meaning prices went down as investors became more wary of a deal not being struck in time. These effects have largely been reversed, with investors again more focused on the inflation and economic outlook — and what that means for interest rates in 2023.
You can keep up to date with all the latest market movements in our Month in the Markets blogs.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
Please remember the value of your investments can go down as well as up, and you could get back less than invested. Past performance is not a reliable indicator of future results.
Sources
