Riding Out the Debt Ceiling Crisis

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How investors can make sense of the standoff

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If you follow the financial news, you've undoubtedly seen a lot of consternation over the debt ceiling fight in Washington. In Showdown Over the Debt Ceiling, our friends at Strategas will parse the political and economic tea leaves around this showdown – here's what you need to know as you think about your own finances.

Keep it in context. We've been here before. In 2011, a debt ceiling standoff between House Republicans and President Obama caused Warren Buffett to liken the threat of default to nuclear war – "basically too horrible to use." But then, as before and since, these fights have proved to be short‐term events – grey swans hiding in plain sight rather than true black swans. While the economic implications can be significant, they haven't led to long‐term changes in the investing landscape.

Expect short‐term volatility to increase. In one three‐week stretch during the 2011 crisis, the S&P 500 fell nearly 17%. White knuckle roller‐coaster rides can be hard to stomach, but investor panic could create investing opportunities.

Have cash on hand. While the chances of default are remote, the consequences of default would be highly destabilizing. To survive a crisis, you need to get to the other side of it – that means having cash on hand to cover six months (or more) of living expenses.

Perhaps this standoff will resolve itself peacefully, like it did in 2008 and 2010. Or it could shut down the government, like it did in 1995. But investors and the U.S. economy have survived previous debt ceiling standoffs – and we will this time too.