Investors should brace for more volatility in financial markets as lawmakers wrestle over the debt limit, but shouldn’t t worry the U.S. will default on its debt, according to Vanguard.
The second-largest asset manager—with 7.7 trillion in global assets under management—believes an agreement will be reached.
“We don’t think there will be a default, but we do believe the decision will be in the 11th hour just before the X-date,” Sara Devereux, global head of the fixed-income group at Vanguard, which manages over $2 trillion in assets, told Barron’s.
Stocks were sliding Wednesday after House Speaker Kevin McCarthy said an agreement hadn’t been reached yet. Treasury Secretary Janet Yellen has said Congress has until June 1—the so-called X-Date—to raise the debt ceiling or risk default.
Devereux said investors should expect more volatility in the lead-up to a deal, and there is a chance the X-date could move, creating more uncertainty.
“We know there are a lot of tax receipts coming on June 15,” she said. “That could be helpful. There’s also the possibility that they temporarily suspend it and punt the decision to September alongside the budget decision.”
If a deal on raising the debt ceiling isn’t struck by June 1, the U.S. may not have enough money to meet its obligations, risking a technical default and potentially triggering a financial crisis.
In that event, Devereux said Vanguard is prepared to navigate a technical default on behalf of its clients. Such a default “means the payment will come, it’s just a matter of when, and a technical default is just an operational headache,” she said.
For now, investors should tune out the noise and stay focused on the long term, Devereux said.
“Be aware there’s going to be volatility and as always, and particularly in times of volatility, know what’s in your portfolio and work with managers with good risk management practices,” said Devereux. “If you like surprises, volatility will find cracks.”
In a note published on Tuesday, Greg Davis, Vanguard’s chief investment officer, urged investors to have a plan they can stick with for the long term and cautioned against trying to time the market.
“Time in the markets is much better for a portfolio than market timing,” he said. “Market timing is incredibly challenging, as the best and worst performance days often happen close to one another. In many cases, timing the market for re-entry simply results in selling low and buying high.”
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