Congress still has not reached a verdict on raising the debt ceiling.
It could send financial markets into freefall if it does not agree on one soon.
However, Congress will likely prevent a stock market crash if it can.
A significant economic event may be pushing the U.S. towards a stock market crash. Yesterday, Treasury Secretary Janet Yellen highlighted the importance of a looming decision. As she laid out, the U.S. must either extend its debt ceiling or risk defaulting for the first time in history, which could happen as soon as June 1. While several paths could lead to Congress increasing the debt ceiling, as CNBC notes, all three scenarios pose certain complications. Meanwhile, until Congress reaches a decision, dark clouds of uncertainty cast shadows over U.S. markets, raising questions for investors.
While a verdict will likely be reached before then, the threat of a stock market crash remains ever-present. Let’s dive deeper into what is at stake for U.S. markets while Congress deliberates on the national debt question.
Is a Stock Market Crash Coming?
Currently, it’s difficult to say if an outright crash is on the horizon for the U.S. But it’s easy to see why investors might be nervous. Over a decade ago, Congress faced a debt standoff that looked eerily similar to what is currently transpiring, and it posed significant problems for the economy. In 2011, Republicans attended to leverage the debt ceiling to negotiate spending cuts. As The Guardian reports, both parties reached a decision within 72 hours of when the country would have otherwise defaulted on its debt. In the days leading up to it, a stock market crash also seemed imminent.
It’s no secret that this isn’t coming at a great time for the market in general. Multiple Federal Reserve rate hikes have pushed stocks down throughout the year. The May Federal Open Markets Committee (FOMC) meeting is quickly approaching, which will likely mean another hike. As InvestorPlace assistant news writer Shrey Dua reports, this could also potentially trigger a stock market crash. However, a crash is even more likely if the debt ceiling is not raised. Many politicians remember 2011 all too well, and they understand that it is in the best interest of everyone to avoid a repeat of that. As the Wall Street Journal reports:
“Doubts that the U.S. could pay back buyers of its securities could therefore have wide-ranging, dangerous financial and economic consequences, including a potential global crisis, according to analysts. Missed payments on other U.S. obligations, including on Social Security benefits, could also cause economic pain across the country.”
Dua also notes, though, that while the U.S. has never had to default on its debt, every day brings it increasingly closer to that grim outcome.
What It Means
While it’s hardly reassuring that the debt ceiling deadline is so close, Congress will likely do what is necessary to see it raised. The national debt is a highly politicized issue, but that doesn’t change the fact that a stock market crash is terrible for everyone. That should help reassure investors that Congress will reach a decision that will stop the U.S. from defaulting on its debt. No one wants to see that outcome.
Investors should watch closely for any progress on this front. Until Congress reaches the verdict that the economy needs, uncertainty will make it difficult for markets to rally.
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