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Watch Your Heads! The Debt Ceiling Is Coming.

Rick Orford - Barchart - Wed May 3, 2023

Another resurging theme is now front and center for investors to digest: the US Debt Ceiling crisis. Thanks to a potential default by the US government by the end of May, President Joe Biden has invited the top 4 congressional leaders next week in the White House for a face-to-face talk to tackle this potential economic catastrophe. If the US's 31.4tn borrowing limit is not raised or suspended, the US will potentially face millions of job losses, bankrupt businesses, and no doubt, a market crash. The debt crisis is due to Republicans and the Biden administration not meeting eye to eye on what's up for negotiation. Republican lawmakers want spending cuts in return for raising the debt limit, while Biden and congressional Democrats want to raise the debt limit unconditionally. And this leaves the question, what will lawmakers decide on, and what should investors expect?

But first, let’s understand what the debt ceiling is.

What Is the Debt Ceiling?

The government debt ceiling is the allowable legal limit on the amount of money the federal government can borrow to fund its operations. Congress sets this limit to ensure that the government does not spend more than it can afford. Once the debt ceiling is reached, the government cannot borrow money to fund its operations and can only rely on incoming revenue to pay its bills. Think of it like a credit card. Once you reach your limit, to continue borrowing, you either have to pay it down, or ask for a limit increase. The same goes for the government.

Why Does It Matter if the Debt Ceiling Is Reached?

In the worst-case scenario where the debt ceiling is reached, the government could be forced to default on its debt obligations. This has serious consequences for investors and the economy, and ramifications would certainly trickle down to businesses and consumers, as borrowing costs will rise and slow economic growth.

What Can Investors Do if Debt Ceiling Is Not Raised?

Should lawmakers decide not to raise the debt ceiling, investors should be prepared for heightened volatility in financial markets. As the debt ceiling approaches, investors may become more cautious and run to safe-haven assets by selling off their positions in stocks and bonds. Investors would opt to protect their investments by reducing exposure to riskier assets, exposure to low-risk investments, or even to defensive stocks that stood the test of time.

If the debt ceiling is not raised, investors will want to look at companies that have whethered several economic crises in the past. One such company is Proctor & Gamble.

Procter & Gamble (PG)

The Procter & Gamble Company is a diversified American multinational consumer goods company that offers a variety of products for personal hygiene and health. The company was founded in 1837 and currently employs over 106,000 active employees. It is headquartered in Cincinnati, Ohio, United States. PG operates through five industry-based sectors:

The Baby, Feminine, and Family Care segment provides baby wipes, diapers, paper towels, tissues, toilet paper, and feminine care items.
The Beauty segment offers items for skin care and hair care.
The Health Care segment sells instant diagnostics, vitamins, minerals, and other personal healthcare items, as well as dental and oral care items.
The Grooming segment markets various shaving products, such as female and male blades and razors, and products used before and after shaving.
The Fabric and Home Care segment markets air care, dish care, fabric enhancers, laundry additives, and detergents.

How Procter & Gamble Weathered Previous Crises

Procter & Gamble has survived these crises by focusing on research and development and its core businesses and investing in them. Over the years, the company introduced Tide laundry detergent and other products that helped Proctor & Gamble stay ahead of the competition.

If Lawmakers Raise the Debt Ceiling, Then What?

Should the debt ceiling get raised (and I'm sure it will), investors should be prepared for (at least) a near-term rally. That said, investors should remain cautious as there are ongoing issues like the high-interest rate environment, high inflation, banking crisis, etc. Investors willing to take a small exposure on stocks can look at quality companies performing well even before the current debt ceiling theme.

One such company is West Pharmaceutical Services, a leading dividend stock that's up 57.95% YTD.

West Pharmaceutical Services (WST)

West Pharmaceutical Services, Inc. manufactures integrated containment and delivery solutions for injectable medicines. The company was founded in 1923 by J.R. Wike and Herman O. West. Currently, the company is headquartered in Exton, Pennsylvania, U.S. Additionally, the company employs over 13,000 employees. The company offers various pharmaceutical products and services, such as:

Indeed, a company such as West Pharmaceuticals that has seen a stellar return YTD will likey continue to rally should the debt ceiling get raised.
Final Thoughts

The debt ceiling is a critical issue everyone must be aware of. It has significant implications for financial markets and the economy as a whole. Whether lawmakers decide to raise the debt ceiling or is maintained, investors should always be ready to respond to what the market gives them, whether it is a rally or a downturn. Understanding how things can pan out is a step toward becoming a successful investor.

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On the date of publication, Rick Orford did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

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