Debt Ceiling And The Stock Market

 

As we get closer to the debt ceiling "cut off date" of October 17th, stock market volatility is beginning to spike as investors are becoming more worried that the markets will repeat the quick drop of 2011 caused by the last debt ceiling debates.

S&P 500 October 2011:

 

This time around, the increase in market volatility may be due to the increased amount of leverage used in investment portfolios. So far, 2013 has treated equity investors well and many may err on the side of caution as we approach October 17th.

More aggressive investors have steadily increased their use of margin in their investment portfolios during 2013 as they have been more focused on Ben Bernanke and less so on the squabbling going on in Washington. As a result, we may be at the start of a rapid reversal in margin borrowing as investors protect year to date gains in their portfolios.

 

Already we are seeing ETF outflows in key asset groups are increasing.

Outflows for S&P 500 Index SPY:

                                                      Source: IndexUniverse

Outflows for US Treasury 20+ Year TLT:

Source: IndexUniverse

Meanwhile, European ETFs are starting to see inflows VGK

Source: IndexUniverse

Investors are clearly reacting to the debates (or lack of) in Washington and we may see a significant pull back if the debt ceiling is not resolved by October 17th.

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