How Should Investors Prepare for a Debt Ceiling Crisis? – Forbes Advisors

Financial Advisors

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Time is running out before the Biden administration and Congress reach a deal on raising the debt ceiling. Treasury Secretary Janet Yellen said the U.S. could default as early as June 1 if Congress doesn’t act.

Aaron Buckman, managing director and wealth manager for the Washington Wealth Group team at Stewart Partners, said clients have questions about the debt ceiling conflict.

“They worry about what will happen to the economy if the debt ceiling isn’t raised,” Buckman said.

The last time bipartisan debate stalled efforts to raise the debt ceiling was in 2011. The delay has damaged the economy, panicked the stock market, nearly pushed the country into default, and caused S&P Global to downgrade the US sovereign rating.

For investors who want to know how best to position their investment portfolio during this sensitive time, let’s take a closer look at the various considerations.

Will the Debt Ceiling Crisis Affect Markets?

First and foremost, it’s worth bearing in mind that the most likely outcome is a last-minute deal to raise the debt ceiling. But as the U.S. moves closer and closer to that line, you may wonder what to do with your investments to avoid potential harm.

“A widespread default by the U.S. Treasury would trigger financial Armageddon,” said Robert Michaud, chief investment officer at New Frontier Advisors. “This means that the wealth of all individuals will be systematically reduced.”

Big financial advisers say there are options to avoid a dispute over the debt ceiling. While threats to markets and economies are imminent, some stocks and market sectors are now poised to benefit from economic reversals. Some will benefit if the crisis is resolved.

“Imagine when stocks start hitting new highs,” says Paul Schatz, president of Heritage Capital and treasurer of the National Association of Active Investment Managers (NAAIM). “When the bears throw in the towel and we all catch up, we’ll see the greatest short squeeze of all time.”

A short squeeze occurs when a trader falls on the wrong side of a short-selling play. They were betting that the price of the stock would fall, but if the price rose, the stock would be under pressure.

The risk, of course, is that the inevitable uptick will take years, not days or weeks.

How investors can take advantage of the debt ceiling crisis

If you’re a half-invested investor looking to take a chance on whatever’s going on in the stock market, how to deal with the debt ceiling crisis shared by the financial experts we interviewed Here are some good ways to do it.

Let’s start with defense stocks. Chris McMahon, president of MFA Wealth and CEO of Aquinas Wealth Advisors, both in Pittsburgh, sees defense contractors benefiting from the deal to raise the debt ceiling.

“Defense companies will benefit as governments may need to spend more on defense as a result of the debt ceiling.”

Note that the iShares US Aerospace & Defense ETF (ITA) is the largest defense contractor exchange traded fund. This $5.7 billion ETF offers targeted exposure to US companies that manufacture commercial and military aircraft and other defense hardware. ITA owns stakes in Raytheon Technologies (RTX) and Lockheed Martin (LMT).

The Fund’s annual expense ratio is relatively low at 0.39%. The total return for the 12 months ended May 12 was 15.54%, compared to the S&P 500 Index return of 6.76% for the same period.

Still, the fund has fallen 4.62% over the past month, but has risen 0.91% for big bogeys. Investors may be concerned about companies that rely heavily on the U.S. government for their profits.

Should You Bet on Banks?

McMahon also sees financial services stocks as another potential sector beneficiary of the debt ceiling deal.

“The financial sector stands to benefit from debt ceiling issues, as higher debt ceilings can lead to more government borrowing, which can lead to higher profits for banks and other financial institutions,” he said.

McMahon agrees with some investors’ concerns about regional banks. The financial institutions best positioned to benefit from increased government borrowing, he said, are mainly the large and well-established national banks. “Regional banks hold large amounts of treasury bills, and we have decided to withdraw from these banks in our portfolio,” he added.

The Financial Select Sector SPDR Fund (XLF), a large ETF with a total net worth of $28.8 billion, caught our eye. XLF is part of State Street Global Advisors stable funds. After a period of very difficult conditions for banks, XLF’s total return over the last 12 months has declined by 1.44%.

US Treasury bills may be worth a look

Yet financial services still carry risks. For another advisor we spoke to, this means avoiding banks.

“Banks hold a lot of Treasuries and other government debt,” said Derek Meiser, investment adviser and CEO of Meizer Wealth Partners. “In the event of a default, the value of these assets could fall precipitously.”

A decline of a similar nature also led to the collapse of regional banks Silicon Valley Bank, Signature Bank and First Republic. But Michaud points to a silver lining in Treasury bills.

“Government bonds can paradoxically perform well because they remain relatively safe assets in the face of potential default,” he said.

Bachmann agreed, saying that Treasuries would be the last safe haven.

If you want to play long-term government bonds, consider the iShares 20+ Year Treasury Bond ETF (TLT). With $36 billion in assets, the space is huge. The expense ratio is as low as 0.15%. The dividend yield is 2.70%, which is quite high.

Keep in mind that TLT’s one-year return of -8.53% reflects the blow long-term bonds have taken while the Federal Reserve has been raising interest rates.

Gold: Traditional Safe Haven

Meiser said precious metals such as gold could benefit from a U.S. debt default. There are many gold stocks and funds to choose from to invest in this traditional safe investment asset.

“Gold and other precious metals have traditionally been viewed as a safe investment during times of economic turmoil,” he says. “If the debt ceiling is not raised and the government defaults, investors may turn to gold and other precious metals to protect their wealth.”

The largest precious metal ETF is SPDR Gold Shares (GLD), with a net worth of $60.7 billion. The annual expense ratio is 0.40%. However, gold is notorious for not having much cash flow, so its dividend yield is zero.

Despite this, the fund’s total return has ranked in the top 10% of the Morningstar Commodity Fund peer group over the past 15 years and in the top 13% over the past decade.

take refuge in public works

Utility stocks are also traditional safe haven assets. Even when the economy is down, consumers won’t turn off the lights, stop watching TV or unplug the refrigerator.

Michaud favors utilities in a scenario in which Congress fails to suspend or raise the debt ceiling, prolonging the debt ceiling crisis and increasing economic volatility.

The Utilities Select Sector SPDR ETF (XLU) is a big candle in the $16.2 billion utility ETF space. Very low glare with an annual expense ratio of 0.10%. The dividend yield is high at 3.01%. Over the past year, the stock has returned -1.63%. But the 10-year average annual increase is his 9.00%. And the fund outperformed his 93% of peers over the past decade.

Similarly, Sam Stovall, chief investment strategist at CFRA Research, said in “traditionally weak seasonal market performance from May to October, plus concerns about possible defaults.” He said utilities were one of his favorite sectors.

Stovall likes Edison International (EIX), an S&P 500 stock with a strong five-star buy recommendation from the CFRA. Currently trading at around $71, Stovall said it could reach $88 within six to 12 months.

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