Weâre headed for one of the fiercest political standoffs in recent memory. Hereâs what it means for your portfolio. [RiskHedge Report] [Stephen McBride]
Markets are about to hit a brick wall By Stephen McBride - RiskHedge The US government is running out of money⦠Washington politicians are in a standoff⦠Is a big dip coming?... Remember this quote over the coming months⦠1. Warning: Donât expect this ânew yearâ stock market rally to last... Markets are about to hit a brick wall. Now, you should know many of my RiskHedge colleagues disagree with my take. But my reasoning is simple: Weâre headed for one of the fiercest political standoffs in recent memory. I believe it will temporarily rock financial markets. It all has to do with the âdebt ceilingâ debate. Let me explain... As an Irishman, I can tell you America does lots of things âbigger and better.â The hospitality is better, so too are the barbeques. Your cars are bigger. US politicians also do âspending other peopleâs moneyâ bigger and better than anyone else. Last year, Uncle Sam spent $6.7 trillion. The US government spends a lot more than it collects in taxes. It funds the gap by borrowing money. And wouldnât you know, America is bigger and better at that too. The US national debt just passed $30 trillion. Some folks think thereâs no limit to how much money politicians can spend, but there is. The âdebt ceilingâ is a self-imposed limit on how much money Uncle Sam can borrow. We recently hit the $31.4 trillion limit. Now Republicans and Democrats are tooling up for a standoff about whether to raise the debt ceiling or not. 2. Hereâs what this standoff means for your portfolio⦠Debt ceiling battles are nothing new in Washington. Congress has had to raise the limit 75 times since 1960. Most of the time, itâs just political theater. Republicans and Democrats argue for a couple weeks and then come up with a plan, which allows both sides to spend more of your money. But once every decade or so, the debt ceiling becomes a huge issue that dominates the headlines. It last happened in 2011 when President Obama faced off with a Republican-controlled House. Congress raised the borrowing limit just two days before the US government was set to default. The idea that the almighty US government wouldnât pay its bills rattled markets. The S&P 500 fell 17% in the months leading up to the deadline. Isnât it funny how politicians argued over raising the debt limit to $15 trillion only a decade ago⦠yet the US national debt has more than doubled since then? Now the US government has maxed out its credit card once again. And Iâm predicting a repeat of 2011. Thatâs because the current political situation most closely resembles 2011. Democrats control the White House, but Republicans hold sway in Congress. Prepare for a barrage of news articles about an impending government shutdownâand how Uncle Sam is just weeks away from defaulting on his debt. Most important of all, prepare for a stock market correction as the debt ceiling drama heats up. Youâre not hearing much about it now, because the government still has cash on hand to pay the bills. But by the summertime, itâll be running low on funds... and this will be the most hotly debated issue in finance. 3. Okay Stephen, tell me how to invest⦠I expect the âgame of chickenâ over the debt ceiling to roll on for a few months. But when push comes to shove, politicians will vote to allow themselves to spend more money. Remember, Congress has raised the limit 75 times since 1960. Theyâre guaranteed to kick the can down the road once again. However, just like last time, I expect stocks will dip before we get a resolution. Does that mean you should sell everything now? Absolutely not. In fact, I recommend buying your favorite stocks on any weakness. Regular RiskHedge readers know Iâm a long-term investor. And while the debt ceiling drama might drive markets over the coming months⦠that doesnât matter if youâre investing on a multiyear timeframe like me. Look at how stocks performed after the 2011 debt ceiling drama, for example. The S&P 500 fell 17% before we got a resolution. Yet it finished 2011 in the green and jumped 13% over the next 12 months. 4. Iâll leave you with my top piece of âdebt ceilingâ guidance. Donât buy into all the negative stories that will be written about how America and the US stock market are in trouble over the next few months. I fell into this trap as a young, inexperienced investor in 2011. I believed everything the financial media said. I was genuinely convinced the US was in serious troubleâthat US markets could crash and never recover. How wrong was I? US stocks tripled over the next decade and outperformed pretty much every other investment on the planet. Ignore the financial commentators who will try to scare you out of your portfolio over the next few months. Use any sell-off as an opportunity to buy your favorite stocks at lower prices. Even if you donât buy, donât panic-sell your entire portfolio over the debt ceiling. When I worked in New Zealand, I sat across from a guy who had the famous quote âThis too shall passâ stuck to one of his monitors. Remember that quote as those around you lose their minds over the debt ceiling. How do you think the debt ceiling debate will play out for stocks? Let me know at stephen@riskhedge.com. Stephen McBride
Chief Analyst, RiskHedge In the mailbag... [Last week](, tech veteran Chris Wood shared why he avoids Chinese tech stocks. Today, two readers share their thoughts... Thank you for your clear and bold conviction on China. I don't know why more people can't see that! I won't invest in China either, and additional reasons are geopolitical and moral. They are planning to be the world's sole superpower and it's outright suicidal to feed the dragon. Morally, they have a million or more in concentration camps (some of my friends have friends there, and they are not Muslims), broke their promises regarding Hong Kong, and are going to take over Taiwan one way or another (speaking of a crisis in chips... further, note what they did to Tibet in 1959, then killed untold tens of thousands of people there and systematically destroyed the culture). I rarely share my views, but I had to cheer your latest email! âBrian Chinese stocks feel like sand castles built above a large collider, thought to be a holding basin beneath which is a series of abandoned mine shafts. That's my current story, and I'm sticking to it until my riskometer turns greenish. I appreciate your summary and your overall service. Warmly âJohn Suggested Reading... [Will you invest in
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guy with me?](
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