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Buy the dip? If the debt ceiling isn’t resolved soon, markets will likely slide

<i>Seth Wenig/AP</i><br/>Traders work on the floor at the New York Stock Exchange in New York
Seth Wenig/AP
Traders work on the floor at the New York Stock Exchange in New York

By Elisabeth Buchwald, CNN

New York (CNN) — If the United States defaults on its debt, it would be catastrophic for the economy. Millions of jobs would be impacted, the cost of borrowing money would skyrocket and government benefits many people rely wouldn’t be sent on time.

But for investors hungry for an opportunity to buy low and sell high, it might not be total doomsday.

Markets have been mostly indifferent to the debt ceiling since it was breached in January. That is bound to change as the default date, also known as the X-date, approaches.

President Joe Biden and House Speaker Kevin McCarthy are set to meet for more talks on Monday afternoon after a weekend with little progress to avoid the nation’s first default.

What goes down could go up

If lawmakers can’t reach an agreement by the last week of this month, it could get very ugly for markets.

The S&P 500 fell by more than 16% over the span of five weeks in 2011 when the United States narrowly avoided a default, which led to a downgrade of the nation’s debt. But two months after the downgrade, the S&P 500 recovered those losses and ended the year virtually unchanged.

Even if a deal isn’t reached in time and the United States defaults, it’s unlikely to go unresolved for a long stretch of time, experts told CNN. And when it does get resolved, it’s quite possible there will be a “relief rally,” said Callie Cox, eToro US investment analyst.

But there could be a correction period immediately following a deal as the Treasury replenishes the cash it burned through when it couldn’t borrow money, said Michael Reynolds, vice president of investment strategy at Glenmede.

Should you buy the potential debt-limit dip?

“There’s been a lot of reward for when people step in and buy the dip,” Cox said. Many investors are still kicking themselves over not buying more stocks at their lows during the height of the pandemic, she added.

But you can’t look at the market in a vacuum.

“We have so many other pressures weighing on the economy,” she said. The US economy has spent the past year defying recession forecasts, but its luck could run out later this year, according to a new survey of business economists. Many big-box retailers’ earnings reports indicated that consumers are cutting back on non-essential purchases, a possible sign of a looming recession.

“You don’t want to get over-invested with a recession on the horizon,” Reynolds said. In his view, it’s only worth taking advantage of a market sale if the S&P 500 dips below 16% of its current value.

If you’re a short-term investor it’s better to err on the side of caution, Cox said. But as a long-term investor if you see stock prices drop below 5% of their current value “it may make sense to buy into that.”

Overall, “it’s really hard to get excited about this market until inflation hits 2%,” she said.

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