Debt Ceiling Schmebt Ceiling: Who Needs Good Credit Anyway?

Research & Analysis
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half baked DD because I’m currently procrastinating a Uni assignment and wanted to get the ball rolling. With the debt ceiling coming up we could see some fear entering the market along with the potential for a credit downgrade in the US similar to 2011. Right now the simple explanation for what’s going on is;

Repubs think Biden’s spending is out of control and won’t raise the debt ceiling untill he passes a bill that includes spending cuts.

Biden won’t agree to spending cuts until the repubs agree to raise the debt ceiling.

With McCarthy having to go through 19 votes for the speaker of the house vote, I think it could get nasty.

Plays;

Defense (LMT, RTX) : LMT is already down 15% since earnings, whether this is debt ceiling related or not I don’t know. Defense stocks dropped about 20% in the two weeks of the 2011 crisis. This could well be just due to SPY dropping although I’m not sure if the market was ETF-ised as it is now. Defence probably won’t get cut with the current climate though.

Financials: Potential for credit downgrade makes bonds worth less. Could be even more pain for regional banks, regionals and financials are the favorite play for me as of now.

Indexes: SPY dropped 10-15% in 2011 during the 2 weeks of the crisis in 2011.

A good 3min video of CGP grey explaining debt limit.

Mav also did a video on it tonight.

The bill proposed by the Repubs has cuts to;

  • Coronavirus unspent funds. (VA medical and research)

  • Cancel student debt relief (potential SOFI play here if it gets passed?)

  • Cuts to IRS

  • Repeal green tax incentives / slash tax incentives for solar energy (Bearish green energy stocks, bullish oil)

Chronological order of events in 2011 (From chat GPT so dates probably arent 100% accurate)

  • July 18, 2011: The United States Treasury Department warns that the federal government will reach its statutory debt limit of $14.3 trillion by August 2, unless the limit is raised by Congress. The SPY closes at 132.00

  • July 22: House Speaker John Boehner breaks off debt ceiling negotiations with President Obama, citing differences over taxes and entitlement programs. The SPY closes at 132.39.

  • July 23: The House passes a “Cut, Cap, and Balance” bill that ties a debt limit increase to significant spending cuts, but the bill is not expected to pass the Senate. The SPY closes at 133.07.

  • July 25: The Senate rejects the “Cut, Cap, and Balance” bill, and President Obama calls for a compromise deal to raise the debt ceiling. The SPY closes at 133.85.

  • July 31: The White House and congressional leaders continue to negotiate over the weekend, but no deal is reached. The SPY closes at 130.72.

  • August 1: The stock market drops amid fears that the United States may default on its debt. President Obama addresses the nation, calling for a “balanced” approach to the debt crisis. The SPY closes at 129.67.

  • August 2: The United States officially reaches the debt limit. The Treasury Department takes extraordinary measures to avoid default, but warns that it will run out of options by mid-October. The Senate passes a bill to raise the debt ceiling by $2.1 trillion and cut spending by $2.4 trillion over the next decade. The SPY closes at 126.39.

  • August 4: The House of Representatives passes the debt ceiling bill, which is signed into law by President Obama later that day. The SPY closes at 120.92.

  • August 5: The credit rating agency Standard & Poor’s downgrades the United States’ credit rating from AAA to AA+, citing political gridlock and the inability to reach a comprehensive deficit reduction plan. The SPY opens at 116.23 and closes at 111.05.

  • August 7: President Obama signs the Budget Control Act of 2011, which raises the debt ceiling by $2.1 trillion and imposes spending cuts of $2.4 trillion over the next decade. The SPY opens at 112.74 and closes at 111.50.

  • August 11: The stock market drops again amid fears of a global economic slowdown. The SPY opens at 114.63 and closes at 112.45.

  • August 12: The Federal Reserve announces that it will keep interest rates at historically low levels through mid-2013, in an effort to stimulate economic growth. The SPY opens at 112.49 and closes at 117.62.

  • August 15: The stock market rebounds slightly, but remains volatile in the wake of the debt ceiling crisis. The SPY opens at 117.74 and closes at 119.78.

Specific stocks.

  1. Bank of America (BAC): Bank of America’s share price dropped from $10.52 on July 18, 2011, to a low of $6.01 on August 8, 2011, a decline of over 42%.

  2. JPMorgan Chase (JPM): JPMorgan Chase was another financial stock that experienced a significant decline in its stock price during the debt ceiling crisis, falling by more than 20% between July 22 and August 8, 2011.

  3. Morgan Stanley (MS): Morgan Stanley’s stock price also took a hit during the crisis, dropping by more than 25% between July 22 and August 8, 2011.

  4. Boeing (BA): Boeing’s stock price was impacted by concerns over government spending cuts, and dropped by more than 20% between July 22 and August 8, 2011.

  5. Caterpillar (CAT): Caterpillar’s stock price was also impacted by concerns over government spending cuts, falling by more than 20% between July 22 and August 8, 2011.

I’m going to be doing some more research in the next week or so once I get this assignment done.

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