C is for Complacency

Should investors be more worried about the debt ceiling squabbles in DC?

Nothing to see here! That appears to be the attitude of investors regarding the debt ceiling.

June 1, the day that Treasury Secretary Janet Yellen says is the “hard deadline” for the US to raise the nation’s borrowing limit in order to have enough money to pay its bills, is rapidly approaching. But there still seems to be an impasse between President Biden and Republican leaders in Congress.

You wouldn’t know that from how Wall Street is behaving though. Stocks continue to rally. The S&P 500 is up nearly 10% this year while the Nasdaq, home to most big tech stocks, has soared more than 20%. Both indexes are enjoying solid gains this month even as the so-called June 1 X-date nears.

Photo by Vlad Tchompalov on Unsplash

What’s more, 10-year Treasury bond yields, which should spike if the US actually defaulted on its debt, are hovering just below 3.7%. That is still near historically low levels and is below the rate where the 10-year began 2023. It’s also well under the 52-week high of 4.3%.

There simply is no fear on Wall Street about a possible debt ceiling screwup. The CNN Business Fear & Greed Index (which I helped create in 2012) is in Greed territory and is not far from Extreme Greed levels.

Sure, Democrats and Republicans may very well drag things out until the last minute before finally coming to an agreement to raise the debt ceiling again. Investors are clearly betting this is just another case of ugly partisan politics as usual. But is that a certainty given how toxic the environment in Washington is right now? Wall Street isn’t pricing in the possibility of a worst-case scenario…and that’s a little alarming.