The debt ceiling debate has not yet worried Wall Street. In a recent survey of fund managers at Bank of America, 71% of investors said they expected the debt ceiling to be resolved before the “X date.”
A survey conducted from May 5 to 11 found that the U.S. could not reach a resolution, even though Treasury Secretary Janet Yellen recently set June 1 as the date the U.S. could no longer be insolvent. Confidence was down 9 points from a month ago. that duty.
When asked what the biggest tail risk facing the market was in the survey, the U.S. debt ceiling ranked last among the top five respondents, accounting for 8% of responses. The top concern was ‘bank credit crunch and global recession’, with about 1 out of 3 respondents focusing on it.
President Joe Biden and House Speaker Kevin McCarthy met last week and resumed talks on Monday. However, little progress appears to have been made toward an agreement.
“I don’t think we’re in a good place,” McCarthy said Monday.
In a speech on Tuesday, Yellen warned that “many financial markets could well collapse” without a deal, but that fear has yet to be reflected in the market.
S&P 500 has been trading between 3,800 and 4,200 for seven months It’s been pretty much unchanged since the start of earnings in the first quarter.
Investors are worried that the crisis will not be resolved by June 1 and that markets already worry about banking industry turmoil, inflation remaining high and the Federal Reserve’s next interest rate decision. It’s about applying pressure.
Preliminary research from BofA shows that the market typically does not react to debt ceiling concerns until two weeks before the X date. It will start in earnest on Thursday.
If historical indicators are indicators, they may experience some volatility and eventually go down. RBC Capital’s Lori Calvasina said in a memo to clients on Monday that the S&P 500 index would plunge in the 10% to 19% range if the debt ceiling crisis, combined with other market stresses, would plunge.
In 2011, a year consistent with the current political structure, markets began the year in a rebound. But as debt ceiling concerns rolled in over the summer, the S&P 500 index plummeted, dropping nearly 20% from high to low heading into X-Date on Aug. 2, 2011.
Julian Emmanuel, head of equity and portfolio strategy at Evercore ISI, said in a memo to clients, “The EVR ISI strategy believes that debt ceiling extensions are likely to be in response, not to prevent market pain. I expect that,” he said. “For investors and U.S. credit ratings, the best short-term (albeit unattractive long-term) outcome is perhaps ‘breaking the long multi-month ceiling’.
Josh is a reporter for Yahoo Finance.
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