Fears of an X-date-induced stock market crash are starting to wind down as lawmakers expedite the passage of the debt ceiling deal. That said, with X-date estimated on June 5, Congress is in a race against the clock, and the stakes couldn’t be higher.
After hours of deliberation yesterday, the House of Representatives finally passed President Joe Biden and House Speaker Kevin McCarthy’s bipartisan debt ceiling legislation. The Republican-majority House passed the bill in a 314-117 vote, despite scores of Republicans refusing to sign on to the bill. The news likely prompted sighs of relief from investors everywhere as the looming threat of default finally eased somewhat.
Indeed, yesterday’s bill passage came as a refreshing change of pace, especially given the seemingly hopeless state of negotiations between Democrats and Republicans on the matter just weeks ago. If you recall, meetings between McCarthy and Biden were halted due to a lack of progress being made, stoking fears that a debt ceiling agreement wouldn’t come in time to avoid a government debt default.
Now, however, the matter at hand is really just how fast the Senate can fast-track the bill.
“Once this bill reaches the Senate, I will move to bring it to the floor as soon as possible,” Senate Majority Leader Chuck Schumer said Wednesday.
Democrats hold a slim 51-49 majority in the Senate, meaning at least nine Republicans will need to vote in favor of the bill for it to pass. While many conservatives have expressed disappointment with the current state of the debt ceiling deal, with McCarthy having rolled back many of the more impactful spending cuts originally included, hopes are still high that the bill will be signed into law.
“I’ll be proud to support it without delay,” said Senate Minority Leader Mitch McConnell.
Will the Stock Market Crash on X-Date?
While most are optimistic that legislators will pass the debt ceiling deal before June 5, some sources of potential catastrophe are still looming. In fact, several senators from both sides of the aisle have already refused to sign onto the deal, including Vermont’s Bernie Sanders, as well as Utah’s Mike Lee. While these holdouts alone won’t be enough to curb the bill’s path to law, there are still potential delays that could result in a U.S. debt default.
Currently, senators from both sides of the aisle are debating potential changes to the bill. Should the Senate make any amendments to the debt ceiling deal, the legislation must go back to the House for final passage. Depending on how long it takes, this could mean the difference between whether the country defaults or not.
In that regard, each side may push for differing changes to the legislation. In a letter tweeted out on May 31, Sanders expressed discontent with some of the spending cuts included in the bill, hence his refusal to sign onto the bill.
“At a time of massive wealth and income inequality I cannot, in good conscience, vote for a bill that takes vital nutrition assistance away from women, infants, children and seniors, while refusing to ask billionaires who have never had it so good to pay a penny more in taxes. I cannot, in good conscience, vote for a bill that makes it harder for working families to afford the outrageously high price of childcare, housing, and health care while making it easier for the wealthiest people and most profitable corporations in America to cheat on their taxes.”
This comes in stark contrast to Republicans, who are disappointed there aren’t even deeper spending cuts included in the bill.
What Would a Debt Default Mean for the U.S.?
The U.S. hasn’t come this close to default since 2011. While the country managed to avoid a formal debt default back then, the political standoff resulted in the first-ever downgrade of the U.S. credit rating, pushing up lending costs in the process.
While the chances of a default remain pretty low, many analysts have already started considering whether the seemingly annual debt ceiling crisis the country endures will be enough to prompt yet another credit downgrade from credit rating agencies.
Should the country default, almost everyone agrees the consequences would be grave. Economists project it’d cause an immediate recession with unemployment above 8%, skyrocketing interest rates, a potential 45% drop in equity prices, and even delayed Social Security checks to retired Americans.
It’s unclear precisely what the path forward for the debt ceiling deal is, but investors are keeping a close eye for any signs of a stock market crash as lawmakers work to pass the bill ahead of X-date.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
