What investors should consider as the debt ceiling deadline approaches
Kevin Swanson, CEO and Private Wealth Advisor of Potentia Wealth, joins Yahoo Finance Live to discuss the potential impacts of the debt ceiling as the October deadline approaches.
Video Transcript
ALEXIS CHRISTOFOROUS: All right, a closer look now at the debt ceiling showdown on Capitol Hill and the potential impact on the markets and investors. Joining us with more is Kevin Swanson, CEO of Potentia Wealth, and Yahoo Finance's Dani Romero. Good to have you here. Thanks so much for being with us, Kevin.
Look, investors may want to prepare for some volatility here as that October 18 deadline nears. What should long-term investors be considering when they're looking at their portfolios?
KEVIN SWANSON: Well, I'd say three things specifically. The first is we're probably going to see additional volatility like we've been seeing the last month in the market. So it's going to be important for us to keep our emergency funds set aside. That's enough cash to cover four to six months of expenses. That's cash or very conservatively invested liquid assets.
Second, we need to rebalance our portfolios. Our risk tolerance has changed as we have seen tech and equities take over a large part of our portfolio growth, so much our fixed income and more of our conservative holdings-- those haven't seen as much growth. So we need to take a look at our risk tolerances and rebalance our portfolios back into alignment again. And lastly, if there's cash on the sidelines, now is the time to hold that cash not put it into the market. This may be an opportunity for us to take advantage of some corrections in the market in the next couple of months with some additional volatility around the debt ceiling and for us to purchase good equities at a discount to today's prices.
DANI ROMERO: And, Kevin, how much of a drop could you see or experience in your portfolio depending on what happens?
KEVIN SWANSON: So if we go back to 2018, we had the longest shutdown in history at that point, just over 30 days. And the S&P lost 6%. That year, we had a 20% correction in the market. Fortunately, the following year we had a 29% return. So while we do see market volatility and potential short-term corrections in the market due to the shutdowns and the uncertainty around those, we do have a tendency to keep positive markets longer term.
DANI ROMERO: And, Kevin, for the retired clients who are expressing concern about what might happen, the debt ceiling deadline-- what do you advise?
KEVIN SWANSON: Again, I think that this is a short-term problem. I mean, before we get to any type of default on our debt, which as a nation we've never done, there are a number of different steps that can be put into place to prevent that. So first, the Treasury can roll maturities, which creates liquidity. Second, they can prioritize payments, which means potentially not paying government employees versus paying our debt.
And then finally, the Democrats do have the ability to approve a debt ceiling increase using the budget reconciliation process. So I think that these three things will help to prevent that. However, the volatility is always a problem, particularly for those people who are in retirement and do need that income. So at this point, I would make sure that you've got enough money in very conservative investments or cash to take you through the next four to six months.
DANI ROMERO: And you know, there's also been debate about the Social Security checks and if they'll go out. What could happen?
KEVIN SWANSON: Social security is part of that existing legal obligation that falls under the debt limit. So the debt ceiling is a total amount of money the United States government is authorized to borrow to meet those existing legal obligations. That includes Medicare benefits. It includes military salaries and Social Security. So all of those payments could be postponed if the Treasury needs to pay the debt. So we go through a process of making some really hard decisions.
ALEXIS CHRISTOFOROUS: Yesterday, President Biden sounded a warning. He said, look, I can't guarantee that the US is not going to default on its obligations October 18. He warned that we could see the value of retirement accounts shrink. And he also talked about the reserve status of the US dollar. What would this do to the currency markets?
KEVIN SWANSON: You know, that's a good question. I take-- let's go back and take a look at the times previous that we have gone through in history where we've had debt ceiling issues. First of all, the debt ceiling itself has been raised 14 times from 2001 through 2016, seven times during President Bush's term and 11 times through President Obama's term. So we run into this issue of the time.
It was in 2018-- I'm sorry, in 2011, where we had the S&P 500 downgrade our debt. And that created the biggest issue for us. In that 2011 downgrading, the Bipartisan Policy Center, they said that we raised borrowing costs by almost $19 billion to be paid over a 10-year period. And that means through 2021, we could still be paying for the debt ceiling debacle that we had back in 2011. So it can have a significant impact.
ALEXIS CHRISTOFOROUS: All right, we're going to have to leave it there. And of course, we're all watching and reporting on what's going to happen is we near that October 18 deadline. Kevin Swanson of Potentia Wealth, thanks so much for being with us.
