Lawmakers have raised the debt ceiling. How should investors respond?
Investors should keep a long-term focus following the debt ceiling deal
With Congress passing and President Biden signing into law the agreement to suspend the government’s $31.4 trillion debt ceiling through early 2025, many investors may be wondering what’s next and how they should respond now that we are past the uncertainty.
We are pleased that a deal has been reached. But our advice to investors hasn’t changed—keep a long-term perspective.
Avoiding the effects of a default
Had lawmakers failed to reach an agreement on the debt ceiling, a potential default by the U.S. government would have been the biggest concern. A default would have been unprecedented and damaged credibility as the U.S. government likely would no longer have been able to fully reap the benefits—notably, financing on the best possible terms— bestowed upon the most reliable debtors. The government’s own financing costs, borne by taxpayers, would have increased. And since broader borrowing costs are pegged to Treasuries, interest rates would probably have risen for businesses, homeowners, and consumers.
The news would have pressured stocks, as higher rates may negatively impact companies’ future cash flows. Global markets and economies would have experienced spillover effects. The prospect of these developments occurring at a time when global recessionary risks are high made averting such a scenario even more crucial.
How investors should respond
To state the obvious, a long-term agreement on the debt ceiling is extremely welcome news for the economy and markets. Headlines about the deadline and other short-term events can be unsettling. But it’s important to remember that markets can rise or fall at any time regardless of whether any such event is imminent. Markets are forward looking and always trying to account for an uncertain future. Investors would be well-served to maintain discipline and focus on the long term; timing the market for re-entry is typically counterproductive and can often result in selling low and buying high.
Our advice to investors is to stay focused on the long term and follow the time-honored investment principles:
- Have clear, appropriate goals.
- Have an appropriate mix of assets to achieve those goals.
- Keep investing costs low.
- Maintain discipline in a well-considered investment plan.
It’s important to remember that whatever remaining market disruption we might see, it will most likely be short-lived. There could still be increased volatility in the short term, but markets historically have been able to get past such events.
Related items
The Debt Ceiling: What History Tells Us (video, issued May 2023)
A Measured Response to the Debt Ceiling Talks (article, issued May 2023)
Vanguard leaders on the possibility of a U.S. debt default (audiocast, issued May 2023)
What Investors Should Know About the Debt Ceiling (article, issued May 2023)
Vanguard’s Principles for Investing Success (research paper, issued June 2020)