If the showdown over the debt ceiling ends badly, it could be good for some investors. They might get a long-awaited chance to snap up stocks and bonds at bargain prices.
“Chaos creates opportunity,” said Stewart R. Massey, chief investment officer at Massey, Quick & Co., which helps endowments, foundations and wealthy families manage more than $3 billion of investments.
White House press secretary Jay Carney said at a press briefing that time is running out to strike a deal preventing the first government default in U.S. history. He urged Congress to do what they were elected to do: Come together to get a deal done. (July 27)
No debt deal?
If the stock market plunges by more than 10 percent, “we would start to be fairly aggressive buyers,” Massey said.
With less than a week remaining before the U.S. government could default on its debt, some investors are thinking about worst-case scenarios, and as they see it even a disaster could have a silver lining.
“You always want to buy when there’s blood on the Street,” said David W. Fenstermaker, a financial adviser at Raymond James.
According to one school of thought, the political deadlock and the shock to the market would be temporary, even if there are lasting effects.
Until this week, investors around the world had generally shrugged off the drama in Washington as the inevitable prelude to a last-minute deal, taking it for granted that the politicians would avert a disaster.
But anxiety is spreading, and some investors are running for cover.
A so-called fear index known as the VIX, which measures expected volatility in the stock market, rose to 27.98 on Wednesday, up from 17.52 on Friday, before a breakdown in negotiations between President Obama and House Speaker John A. Boehner (R-Ohio). The index is based on bets investors are placing that stocks will move sharply.
The cost of hedging against a default on Treasury bills has also leapt. A one-year insurance contract on $10 million of debt soared to $80,000 Wednesday from less than $23,000 on May 17.
Investors were paying more Wednesday to insure against a loss on U.S. debt than they were to hedge against a default by Turkey, Thailand, the Philippines or the Slovak Republic. The cost was about four times the price for British debt, almost twice the price for Russian debt, and more than double the price for IOUs issued by Panama.
Increasingly, investors in garden-variety stock mutual funds have also been heading for the door.
Outflows from long-term stock mutual funds totaled $6.8 billion during the week that ended July 20, the Investment Company Institute reported Wednesday. That was nearly double the prior week’s total, and it was before the debt ceiling showdown entered a more perilous stage.
One of Fenstermaker’s clients telegraphed his intentions Monday morning, as markets reacted to the blowup between Obama and Boehner.
“If gridlock in Washington causes the stock market to take a big hit this week, I will be a buyer,” the client, an accountant in his 60s with two children in college, told Fenstermaker by e-mail.
By late Wednesday afternoon, Fenstermaker was helping another client craft a plan to liquidate a chunk of her retirement savings, the financial adviser said. That client, a Washington lobbyist, was panicked about the latest developments and looking for “a time out,” Fenstermaker said.
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