As we discussed on our quarterly call for clients in March, we expect increased volatility in the markets in the 2nd quarter because of the looming debt ceiling debate. House Majority Leader Kevin McCarthy has released a Republican bill that would lift the debt ceiling by $1.5 trillion or extend it through March 2024. This will hopefully bring both sides of the table to negotiate but it is likely to come down to the wire like it did in 2011 when the government was just a couple of days from running out of money.
In 2011, the S&P 500 index fell dramatically by almost 20% in just 12 days. Even after the two sides came to an agreement, the market fell further because credit rating agency Standard & Poor's downgraded US sovereign debt for the first time to AA+.
Brace yourselves for a period of uncertainty because the two political parties are as divisive as ever.
When will government run out of money?
Under US law, the government can spend only if it has sufficient funds to pay for it. These funds can come either from tax receipts or from borrowing by the Treasury.
We should get clarity this week as to when the administration will be unable to fund its current spending. It will depend on 2022 tax collections. As of last week, tax receipts were running 35% below last year.
If tax receipts continue to undershoot, Goldman Sachs says that the odds tilt toward an early June deadline. However, if tax receipts are enough to fund the government through June 15, then estimated tax payments on that date may push the deadline into July or August.
We expect both sides to eventually come to an agreement to raise the debt ceiling; but in the meantime, the market doesn't like uncertainty and this will likely lead to a bumpy period ahead for financial markets.
