How the Debt Ceiling Fight Could Roil Markets

With Congress having until June 1 to raise or suspend the debt ceiling, the window to avoiding a default is rapidly closing. Should the U.S. default, the results would be far-reaching and potentially catastrophic.

In a white paper issued by T. Rowe Price, Michael Pinkerton, an associate investment analyst in the firm’s U.S. equity division, explores the ramifications of this political brinkmanship and how it may impact investors. According to Pinkerton, while failing to raise the debt ceiling is not a viable option, the fight itself could agitate markets.

“Volatility in the bond and stock markets would likely increase as the U.S. Treasury gets closer to running out of money to pay its obligations,” Pinkerton wrote. “And investor sentiment could take a bigger hit if peak fears about the debt ceiling were to coincide with a marked deterioration in economic data.”

If the fight over the debt ceiling leads to the U.S.’s credit rating being downgraded or the government missing a debt payment “the resulting turbulence would be felt in markets worldwide,” since there are so many assets that are priced off U.S. Treasury bonds.

“Given the consequences of failure, Congress should find a way to extend the debt ceiling. But the journey to get there is unlikely to be smooth,” according to Pinkerton.

See more: “The Limits of Passive Fixed Income Investing

We’ve seen this play out before. The similar political standoff around the debt ceiling in 2011 led one agency to downgrade the U.S.’s sovereign credit rating.

Continued Volatility Expected

Regardless of whether the debt ceiling crisis is addressed in time, continued – and possibly increased – market volatility is expected. So, investors should consider including some actively managed products in their portfolios to help navigate through the storm.

If passive management is putting your car on autopilot, then active management is letting the manager grab the wheel. Additionally, active managers with greater resources and greater scope benefit from economies of scale. This can often translate to better returns.

“Active managers have the flexibility to take advantage of market volatility and add to favored positions when prices become more attractive,” said VettaFi’s head of research Todd Rosenbluth.

As part of its lineup of active ETFs, T. Rowe Price offers a suite of actively managed equity ETFs, including the T. Rowe Price Blue Chip Growth ETF (TCHP), the T. Rowe Price Dividend Growth ETF (TDVG), the T. Rowe Price Equity Income ETF (TEQI), the T. Rowe Price Growth Stock ETF (TGRW), and the T. Rowe Price US Equity Research ETF (TSPA).

T. Rowe Price has been in the investment business for over 85 years. The firm conducts field research firsthand with companies, utilizing risk management and employing a team of experienced portfolio managers carrying an average of 16 years of experience.

For more news, information, and analysis, visit the Active ETF Channel.