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May 19, 2023 at 02:48 PM
Stocks are primed for a precipitous drop if the U.S. fails to raise the debt limit and delays government payments.
That’s the warning from a team of UBS strategists. Although it’s unlikely, if the U.S. formally defaults and delays all payments beyond principal payments for a week, the S&P 500 will fall as much as 20% toward 3,400, the team led by economist Jonathan Pingle said.
In that case — one of four outlined by the bank — the country could shed at least 265,000 jobs and take a 0.3 percentage point hit to gross domestic product.
The S&P 500 would stay suppressed before slightly rebounding to end 2023 near 3,700. That’s well below the 3,800 to 4,200 levels the benchmark has been stuck in all year.
The gauge was testing the upper end of that range on Friday morning amid optimism that debt-ceiling talks were progressing. In the bank’s most bearish set-up, the S&P would end the year near the strategists’ expected recession lows of 3,400 to 3,500.
Change of Heart?
But stocks fell later Friday amid a slide in banks and concern U.S. lawmakers are struggling to reach a deal to prevent a default. The S&P 500 halted a two-day rally, failing to stay above the closely watched level of 4,200. A Republican representative said bipartisan talks in Washington are on a “pause.”
A default isn’t in the bank’s base-case scenario, however. What’s most likely is that the U.S. will lift the debt ceiling with minimal fiscal drag in the near term, the strategists wrote in a note Friday.
