Debt Ceiling Market Crash Entirely Possible: What to Do Now If It Actually Happens

The “buy the dip” financial news teleprompter readers and the 30-year-old portfolio managers that have never seen a market crash are suddenly very silent and increasingly cannot be found. Market veterans and “hey boomer” professionals have seen this show before.

Back in 1987, the Dow Jones industrial average plunged a stunning 22% in one day. The equivalent today would be a drop on the venerable index of almost 7,300 points. During the period from 1929 to 1932, the stock market plummeted a stunning 83% and many people lost everything. That debacle caused the Great Depression, which really only ended when we entered World War II in 1941.

From 2007 to 2009, during the height of the mortgage and real estate collapse, one that brought us dangerously close to another depression, the market dropped a huge 57%. When stocks finally bottomed at an ominous intraday low of 666 on the S&P 500 on March 9, 2009, we put in the floor for the longest bull market in history. That bull market ended in January of 2022.

So where do we stand now? Very possibly on the precipice of a much larger decline than what we saw last year if the debt ceiling negotiations are not concluded and voted on by Friday. With the potential for more rate hikes coming (Federal Reserve President Bullard said another two increases could be forthcoming), we could be set up for a massive sell-off if there is indeed a debt default.

One positive for investors is that, for the most part, consumers and businesses are in reasonably good financial shape. Stock portfolios and home prices have increased dramatically over the past few years, and the financial system is not teetering on the abyss as it was globally in 2008 when Bear Stearns and Lehman Brothers collapsed and Merrill Lynch had to be bought by Bank of America at the last minute to avoid a similar fate.

One thing is for sure, the path of least resistance will be down if the debt ceiling is breached. There are some important items for investors to consider now, as they may have to prepare for the worst.

Do not continue trying to catch the proverbial falling knife. Instead, it may make sense to match current losses against gains, even if they are short-term in nature, to help build up a cash supply. The dry powder may come in handy down the road.

Immediately, if at all possible, close out any positions on margin. For individual investors to use margin loans to buy more stock is a bad plan when times are good, especially when those margin positions are high-volatility momentum stocks.

As we have recommended for years at 24/7 Wall St. a position in gold helps to mitigate the downside. As we noted recently, the precious metal could be going back to all-time highs, and going there soon.