News & Our Thinking

The 2023 debt ceiling debate is looming on the minds of investors and the economy as a whole. Ward Brown turns back the clock to 2011 to compare current tensions to the tumultuous time in the debt ceiling’s history. Is Congress in 2023 doomed to follow the 2011 roadblocks, market lows and bond downgrades, or will cooler heads finally prevail?

Hello, I’m Ward Brown. Winston Churchill once quipped, “You can always count on Americans to do the right thing – after they’ve tried everything else.” It seems an apt quote with the looming debt ceiling debate. We have been here before, specifically 12 years ago, in 2011. We thought it would be enlightening to compare the situation now with how things transpired then. Investors are hopeful for a deal in 2023 and we would agree, but “hope” only gets us so far. Let’s take a look at 2011, when Congress and the President pushed things a little too far.

It is important to note the different circumstances in 2011 versus today, but one notable similarity is that most people recognize the need for adults in the room to get this settled. Neither the economy nor the stock market will react favorably the longer this drags out. Looking back at the timeline of events in 2011, it unfolded like this.

In January, then Treasury Secretary Tim Geithner sent a letter to Congress, urging lawmakers to get a deal done. In February and March, the haggling continued. The major roadblock, then as now, was differing views on proposed spending cuts and deficit reduction policies. Speculation on a government shutdown gained steam by the end of March. By April, the treasury secretary Tim Geithner was using various stop-gap funding measures to keep the doors open. It got silly. On April 8th, with one hour to go before kicking everyone out and locking the doors, Congress passed a funding extension to last, get this, for one week. On April 15th, a deal was passed to fund the government through fiscal year end September 30th. Nonetheless, the ceiling was officially hit on May 16th. Geithner had to shuffle money around to pay the bills.

For a time, the market was forgiving of this spectacle, assuming negotiations would conclude with a deal. They did not. Talks dragged on through June and July, both sides dug in. Don’t forget; at this time, the world economy was still slowly recovering from the Great Financial Crisis in 2007, ‘08, ‘09. It was fragile, and cracks quickly reappeared. The jobs report for June showed hiring slowing to a crawl. Manufacturing data declined precipitously throughout the summer. You might also remember things like national parks being closed as all peripheral spending was reigned in.

In July 2011, Moody’s famously put the AAA rating of the United States government bonds on review for possible downgrade. Their peer Standard & Poor’s did the same a day later, placing the US sovereign rating on “CreditWatch with negative implications.” This had always been considered unthinkable.

As the spring and summer wore on, the breakdown in talks and a downgrade of US credit quickly changed the stock market landscape. From the end of July to early August, the S&P 500 corrected by nearly 20%. Unfortunately, while President Obama ultimately signed the debt deal into law on August 2nd, the ultimate stock market low was not reached until early October. The whole charade was totally avoidable, but we might be here again.

Looking back at 2011, it took the actions of global central banks to restore calm. That autumn, the Federal Reserve in the United States announced stimulus in the form of what they called “Operation Twist” shifting to buying longer-term debt securities as well as the potential for “QE3,” or additional quantitative easing. In Europe, a debt accord was reached, and the European Central Bank cut interest rates. China added to the coordinated central bank easing by cutting reserve requirements. It worked. The market quickly recovered, and economic data began to dramatically improve.

So how does 2011 contrast with today? Well, the debt ceiling in 2011 was just over $14T. Just twelve years later, it is $31T. Today, the economy is not improving out of a trough as it was in 2011; it is slowing out of a peak. Global central banks are not easing monetary conditions today. They were in 2011.

In 2011, the price-to-earnings or PE ratio of the S&P 500 was around 11x. It is 19x today, meaning it was cheap back then, not so much today. One piece of the puzzle that is the same, however, is political leadership apparently showing no interest in working together to get a deal done. Hopefully, they do not “try everything else” before allowing cooler heads to prevail. If not, the debate over whether the US economy will undergo a “soft” or “hard” landing will get muddier, and the stock market, though showing plenty of mettle thus far in 2023, won’t like that one bit.

We are not predicting a repeat, and there has been sign of progress in recent days, but it’s always good to look back at history and learn from it. Hopefully, leadership in Washington, DC, agrees with us.

Thanks for watching. 

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