Financial advisors tune out debt ceiling hysteria

With total U.S. debt eclipsing $31.7 trillion and counting, most consumers and many financial advisors rank the latest Washington kerfuffle about raising the debt ceiling right up there with worrying about being struck by a meteor.

Even after Treasury Secretary Janet Yellen’s ominous warnings of an economic Armageddon if politicians aren’t allowed to borrow more money, as the June 1 deadline approaches, the financial markets have been reacting as if there are bigger fish to fry.

“Our advisors and clients are more concerned about the repercussions of inflation, the Fed rate hikes and the ongoing banking crisis, more so than the debt ceiling debacle,” said Jon Ulin, chief executive of Ulin & Co. Wealth Management.

“As we are not out of the woods just yet from the slow, ongoing bear market now heading to its 18th month in June, we are making some minor adjustments to our clients' balanced strategic portfolios, more so in the face of the slowing economy and potential bumpy Fed landing, than the outcomes of the debt ceiling,” Ulin said.

Even with Yellen’s recent claims that a U.S. default would lead to an “economic and financial catastrophe” that would cause millions of Americans to lose their jobs and the stock market to lose nearly half its value, financial advisors are mostly shrugging off that prospect as if they’ve seen this dance before.

And they have. The debt ceiling, first introduced in the U.S. in 1917, has been raised more than 100 times since World War II.

Even the memory of 2011, when an ugly political fight and last-minute increase in the debt ceiling resulted in the first-ever downgrade of U.S. Treasury debt, isn’t enough to produce the kind of panic politicians might be hoping for.

“This is not 2011,” said Paul Schatz, president of Heritage Capital.

“While 2023 and 2011 both had debt ceiling debates, 2011 also had the downgrading of the U.S. along with the collapse of Greece,” Schatz said. “The media are playing up the debt ceiling debate and feeding off Janet Yellen’s Chicken Little hysteria. Hyperbole isn’t helpful and frankly, it’s embarrassing.”

Jim DeGaetano, chief executive of Diamond Wealth Advisors, agreed that “headline risk can definitely lead to negative client emotions about money,” but he described the noisy debt ceiling debate as “political posturing.”

“There is no benefit to either party to not increase the debt ceiling,” he said. “Biden is up for reelection and McCarthy's ascension to the House Speaker was not easy. The likelihood of a government default is very low.”

Part of the reason advisors aren’t sweating over a repeat of 2011 is that the ultimate fallout from all the political infighting wasn’t even that bad.

“Following the 2011 debt crisis, the S&P 500 rewarded long-term investors with a double-digit return in 2012,” said Matt Garasic, founder of Unrivaled Wealth Management.

“I continue to encourage clients to stay focused on the long-term plan and maintain the diversified asset allocation we mutually established across various asset classes and regions,” Garasic said. “While circumstances can play out differently this time, we maintain our principles as long-term investors.”