Debt ceiling deal avoids crisis for now – and presents some investment opportunities

The debt ceiling agreement between President Biden and House Speaker Kevin McCarthy — if approved by Congress — averts a default that would have severely harmed the world economy. And though the deal does not include any specific elements that directly affect family offices and high-net-worth investors, it does hint at some investment opportunities. 

“The impact would really come from how financial markets behave, which impact their investment portfolios,” said Tim Baker, CFA, founder and CEO of Metric Financial LLC in Simsbury, Connecticut. Investors who make short-term changes based on potential outcomes may — or may not — be effective, Baker said.

The deal suspends the debt ceiling without raising it, so “it kicks the can down the road to January of 2025,” he said. “At that point, it could mean new issues if the Treasury raises more debt between now and then with no increase in the debt ceiling.”

As for family businesses, Baker said the proposed agreement includes curtailing spending, “which would mean tighter fiscal policy [government spending] at a time of tighter monetary policy” in the form of Federal Reserve interest rate increases to stem inflation.

If that leads to more layoffs in the private and public sectors, that “could strain businesses in terms of consumer spending,” Baker said.

He encourages investors to focus on longer-term goals and diversify among stocks, bonds and cash “to avoid having to take losses to meet near-term cash needs.”

Pat Soldano, president of Washington-based Family Enterprise USA, said she is pleased that both parties worked together to avoid a government shutdown. “I hope that the final legislation does not disincentivize successful individuals, including family offices and family businesses, to continue to invest in the future of the American economy,” Soldano said.

In general, investors haven’t been concerned about the debt ceiling crisis — with the S&P up around 6.5% over the past three months. And optimism about a deal boosted a number of industry sectors, “led by autos, broadline, retail, copper, electronic manufacturing services and semiconductors,” Sam Stovall, CFRA Research’s New York-based chief investment strategist, wrote in a note to clients. 

Given that the deal lifts military spending and preserves Biden’s Inflation Reduction Act, which expands broadband access, it should benefit telecom companies, internet service providers and defense contractors and defense-focused exchange-traded funds. Through the year ending May 26, the Invesco Aerospace & Defense ETF is up 11.30%.

Infrastructure is another area of opportunity, Derek Miser, president of Miser Wealth Partners in Knoxville, Tennessee, told Forbes. “If the government plans to increase spending on infrastructure projects, sectors such as construction, engineering, materials and transportation may benefit,” Miser said. 

Vanguard was pleased with the agreement, telling investors in a note: “A long-term agreement to raise the debt ceiling is welcome news for the economy and markets. Failure to resolve the impasse could cause much more uncertainty, market volatility and damage to U.S. credibility. But the debate should have little impact on your well-structured investment plan, which should maintain a long-term perspective and ignore short-term events.”