Debt Ceiling Problems Could Knock Stocks Down 25%

The financial website MarketWatch recently ran an article about what happened during the debt ceiling crisis of 2011. The period was unkind to stocks. From July 10 to August 23, large-cap stocks fell 17% and small caps dropped 24%. By contrast, the value of gold rose 21% in the same period. (The national debt increased the most under these presidents.)

Fast forward to 2023. A similar drop would bring the S&P from 4,100 to 3,400. The last time it traded that low was in November 2020. The difference is that the drop would not happen over months. It would happen over weeks—or less.

Investors would not be wiped out, but it could be close. Many investors have benefited from the bull market that started in 2009 in the depths of the Great Recession. That benefit could disappear.

A drop of this magnitude would wipe out the net worths of millions of people. They would tighten their belts immediately. Consumer spending and much of the economy would grind to a halt. If the debt were to go on for more than a few weeks, the resulting recession would be horrible.

The Washington Post summed up the effect on equities: “Stocks would likely plummet on the expectation of a wider economic downturn, as interest rates rise and investors pull funds out of the market to preserve their access to short-term cash.”

Americans have not been robbed of their net worth in days or weeks. Even during the Great Recession, the process took months for most people. The double gut punch of falling stocks and rising interest rates hit them then. In a default, variable-rate mortgage payments would soar because they are tied to Treasury bills. And a default would drive up the cost of the federal government to raise money.

The stock market last had a major collapse in 2008 and 2009. While not in speed but in terms of value, that could happen again.

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