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Strategies for Investors Amidst the Looming U.S. Debt Ceiling Crisis

Strategies for Investors Amidst the Looming U.S. Debt Ceiling Crisis

The Biden administration and Congress are in a race against time to strike a deal to increase the debt ceiling. Janet Yellen, the Treasury Secretary, has warned that a U.S. default could be imminent as early as June 1 if no action is taken by Congress.

Washington Wealth Group's managing director and wealth manager, Aaron Brachman, notes that his clients are expressing concern over the ongoing deadlock around the debt ceiling. "The anxiety centers around the potential implications on the economy if there's no agreement to raise the debt ceiling," Brachman observes.

Historically, we can look back to 2011 when a similar polarized debate delayed raising the debt limit. This led to a considerable impact on the economy, a panic in the stock market, and even a near default for the country. As a result, the U.S. sovereign credit rating was downgraded by S&P Global.

Understanding the Potential Impact on Markets and Investments

Primarily, it's crucial to remember that the most probable outcome is a last-minute agreement to raise the debt ceiling. However, as the U.S. edges closer to the brink, you might be contemplating strategies to shield your investments from potential harm.

"A wide-ranging U.S. Treasury default would ignite financial chaos," warns Robert Michaud, chief investment officer at New Frontier Advisors. "This could cause a substantial drop in individual wealth across the board."

Leading financial advisors propose several strategies to navigate the debt ceiling standoff. While the threat to markets and the economy looms large, certain stocks and market sectors are likely to profit from the present economic turbulence. Other areas are expected to gain once the crisis is resolved.

"Visualize stocks breaking to new highs," speculates Paul Schatz, president of Heritage Capital and treasurer of the National Association of Active Investment Managers (NAAIM). "We could witness an epic short squeeze as bearish investors capitulate and everyone attempts to join the upward move."

A short squeeze refers to a scenario where traders betting on stock prices falling get caught out by increasing prices instead. The associated risk, of course, is that the subsequent rally may take longer to materialize, potentially years rather than days or weeks.

Opportunities for Investors Amidst the Debt Ceiling Crisis

For optimistic investors ready to capitalize on opportunities regardless of the stock market's state, several approaches have been suggested by financial experts to navigate the debt ceiling crisis.

Starting with defense stocks, Chris McMahon, president of MFA Wealth and CEO of Aquinas Wealth Advisors, both in Pittsburgh, foresees defense contractors profiting from a deal to raise the debt limit.

"The government may have to increase defense spending due to the debt ceiling issues, and defense companies stand to gain from this," McMahon suggests.

The iShares U.S. Aerospace & Defense ETF (ITA), the largest defense contractor exchange-traded fund, offers focused exposure to U.S. companies involved in commercial and military aircraft manufacturing and other defense equipment production. It owns stocks like Raytheon Technologies (RTX) and Lockheed Martin (LMT).

Considering Financial Services Stocks

McMahon also predicts that financial services stocks could potentially benefit from a debt ceiling agreement.

"An increased debt limit could lead to higher government borrowing, translating to bigger profits for banks and other financial institutions," he explains.

However, McMahon does express concern about regional banks, suggesting that the most likely beneficiaries from increased government borrowing are large, established national banks.

He elaborates, "Regional banks have a significant proportion of T-Bills in their portfolio, and we have decided to divest from those banks in our portfolio."

Should You Look into U.S. Treasury Securities?

While financial services carry their own risks, another perspective recommends steering clear of banks entirely.

"Banks hold a large amount of U.S. Treasury bonds and other government debt. A default could trigger a significant devaluation of these assets," warns Derek Miser, investment advisor and CEO at Miser Wealth Partners.

Previous declines of a similar nature have led to the downfall of regional banks like Silicon Valley Bank, Signature Bank, and First Republic. Nonetheless, Michaud points out the potential benefits of U.S. Treasury securities.

"Even in the face of a potential default, Treasurys can perform well as they continue to be seen as the safest asset class," he points out. Brachman echoes this sentiment, adding, "In the face of crisis, Treasurys are the ultimate safe haven."

For those interested in long-term Treasurys, consider the iShares 20+ Year Treasury Bond ETF (TLT), a leader in its space with $36 billion in assets. Its expense ratio is low at 0.15%, and it offers a respectable 2.70% dividend yield.

Turning to Gold: The Traditional Safe Haven

Derek Miser also suggests that a U.S. default could benefit precious metals like gold. There are a variety of gold stocks and funds that offer an investment avenue into this traditional safe haven.

"In times of economic upheaval, gold and other precious metals have typically been seen as safe investments," he says. "If the government defaults on its debt obligations due to failure to raise the debt ceiling, investors may turn to gold and other precious metals as a wealth protection strategy."

The largest precious metals ETF is SPDR Gold Shares (GLD), with a staggering $60.7 billion in net assets. However, it's important to note that gold lacks significant cash flow, resulting in a zero dividend yield.

To conclude, as the debt ceiling debate unfolds, investors are navigating a financial landscape filled with uncertainty. However, understanding the potential outcomes and making strategic moves can help safeguard and potentially grow your investments.

The views of the experts interviewed in this article suggest a range of possibilities, from defense stocks to banking, U.S. Treasurys, and gold. Whether it's betting on increased defense spending or a potential rise in government borrowing, holding onto Treasurys as a safe haven, or turning to the traditional safety of gold, these are all potential ways to manage your investments in these challenging times.

While this period of uncertainty is undoubtedly stressful, it's crucial to remember that investing is a long-term game. Markets have weathered many storms in the past and will continue to do so in the future. It's also important to note that every investor's situation is unique, so it's always best to seek advice tailored to your specific needs and financial goals.

Remember, while no one can predict the exact outcome of the current debt ceiling situation, being well-informed about the potential impacts and strategies will ensure you're prepared for any scenario. Ultimately, the key is not to panic, but rather to make thoughtful, informed decisions that align with your long-term investment strategy.

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