Investors are increasingly on edge as debt ceiling talks have yet to produce a deal, with just seven days until the Treasury’s June 1 default deadline. Going down to the wire in 2011 was disastrous for the stock market — something nobody wants to repeat this time around. We put together a chart that highlights the risk of traveling that path again. But first, some background: U.S. Treasury Secretary Janet Yellen has called out one week from Thursday as the target date, or X-date, for default, while Goldman Sachs’ chief political economist thinks there could be another week, pegging June 8 or 9 as the X-date. Either way, this game of chicken with the nation’s debt and the uncertainty it brings isn’t good for anyone. We often say that investors like Washington gridlock because it makes for a predictable environment. What we don’t like is dysfunction, and we’re seeing it play out in real-time. However, we do think a deal will eventually be reached because the alternative is almost unthinkable: an unprecedented U.S. government default. Unfortunately (or perhaps, fortunately), there’s a recent historical analogue for Washington and Wall Street to contemplate. The 2011 debt ceiling standoff led to about a 17% decline in the S & P 500 from late-July to mid-August 2011. The X-date back then was Aug. 2, and a deal was finally struck on July 31 — about as close to the deadline as you can get. So close, in fact, that on Aug. 5, 2011 the Standard & Poor’s credit rating agency issued its first-ever downgrade of U.S. sovereign debt — from the highest AAA to AA+. The risks of the current dance turning out like 2011 — especially with Fitch now placing the United States’ AAA rating on a negative rating watch — are plain to see looking at this one chart. To illustrate this cautionary tale, we lined up the X-dates in 2011 and 2023 and counted back 25 days and counted forward 30 days. The blue line represents the S & P 500’s daily percent changes during that period. The…
Read the full article here