U.S. debt limit
The debt ceiling: What history tells us
May 31, 2023
As the debt ceiling debate continues on Capitol Hill, we look back on what’s happened in the past when we came close to defaulting on the nation’s debts.
This 2-minute video gives a historical perspective on increases in the U.S. debt limit and how the financial markets reacted the last three times we’ve come close to the deadline. The market reactions were inconsistent across time and asset classes, highlighting the difficulty of trying to time the market.
Read the transcript
Voice over: The US statutory limit on federal debt, or the debt ceiling, has been changed 122 times since 1940, including 29 times since 2000.
The closest we came to a debt default was in 2011. These charts show cumulative percentage returns for stocks and bonds before and after the debt ceiling deadline. There was high volatility for stocks as we approached and went past the deadline. Bonds in general did relatively well, despite Standard & Poor’s downgrading the credit rating of the United States from triple A to double A plus.
In 2013, Congress suspended the debt limit three times in February, May, and October - before finally resolving it in February 2014. There was volatility for both stocks and bonds, but stocks did well overall.
In 2021, the US again came close to the brink in October. There was high volatility for both stocks and bonds.
In 2023, we’re once again close to the brink. A default on the nation’s debt would be unprecedented. What can we learn from past events? There is no consistent pattern in the markets, across time or across asset classes. Markets can rise or fall well before any debt deadline and immediately after any resolution. Trying to time the markets can be counterproductive. And, investors are well-served by maintaining discipline and focusing on the long term.
Related links:
- Keeping perspectives in times like these (web page hub with links to various articles and audiocasts related to the debt ceiling and market volatility)
Notes:
All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account.
There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.
Investments in bonds are subject to interest rate, credit, and inflation risk. U.S. government backing of Treasury or agency securities applies only to the underlying securities and does not prevent share-price fluctuations. Unlike stocks and bonds, U.S. Treasury bills are guaranteed as to the timely payment of principal and interest.
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