Tuesday Tidbit — What’s the Next Crisis after the Debt Ceiling Resolution?

Google “US debt ceiling 2023” and you’ll find more than 100 million results. It took months of finger pointing, political power plays, and economic brinksmanship to finally reach a deal to extend the debt ceiling for another two years. Millions of articles and news segments were devoted to a topic that ultimately was much ado about nothing. The fact that the deal came two days before a potential U.S. debt default should come as no surprise because deadlines create deals. Here are our four takeaways from the debt ceiling resolution:

1. Beware the Power of Recency Bias — Our brains trick us into believing that more recent events are more painful, more partisan, and/or more important than past events. The truth is that the debt ceiling has been raised 20 times since 2001 alone. We’ve seen these political theatrics before and unfortunately we’ll likely see them again in two years. Being mindful of the recency bias in all of us can help investors remain calm at the height of the next storm.
2. Resiliency is Key for Stocks — Since the beginning of the year, the stock market has faced a wall of worry that’s included a banking crisis, war, sticky inflation, Fed rate hikes, recession worries, and the debt ceiling debacle. And yet, the S&P 500 index is up 12% year-to-date.
3. Resiliency is Key for Investors, Too — In 2019, the wall of worry for stocks included tariff and trade issues with China and other trading partners. In 2020, the pandemic and the U.S. Presidential Election canvassed the wall of worry. In 2021, it was COVID variants and inflation fears. Yet between 2019 – 2021, stocks pole vaulted over the wall of worry every year generating an average annual return of 18%. Last year, stocks couldn’t climb the wall of decades-high inflation and record Fed rate hikes. Then again, stocks are positive about 3 out of every 4 years historically. There will always be a wall of worry for investors. The principle of staying invested over the long-term to achieve your financial goals is simple but not easy.
4. What’s Next on the Wall of Worry? — Is it recession worries, inflation, geopolitical issues, or something else off the current radar? It’s impossible to know but we can be sure the wall of worry will always be there for two reasons. First, our brains are built to look for what’s wrong. It’s a survival mechanism that kept mankind alive for centuries. Secondly, the media understands this negativity bias well and capitalizes on it with the content they create. It’s how financial media pulls the strings of investors. The more you worry, the more you watch or read, and the more money media companies make.

The debt ceiling debacle dominated headlines for months, then disappeared in days. It created waves of worry for investors and ultimately, we survived and so did the financial system. When one market concern falls off the wall of investor worry, another will inevitably replace it. If we don’t learn from history, we are destined to repeat it. As the Tidbit quote below reminds us, adversity is a part of life and a part of investing. How we deal with it is up to us.

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John Fischer, CFA®, CFP® | Chief Investment Officer
Mosaic Family Wealth
john@mosaicwealth.com | MosaicWealth.com

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