Stocks will be damaged even if lawmakers reach a debt ceiling deal, market veteran says

Stocks will come under pressure even if the US raises the debt ceiling in time, market veteran James Athey said.

• Stocks will feel pain even if lawmakers raise the debt ceiling before the X-date, market vet James Athey said.
• That's because government spending cuts will weigh on growth, which will weigh on stocks.
• Biden is scheduled to continue debt ceiling talks with congressional leaders on Tuesday.

Stocks may feel the pain even if lawmakers reach a deal to raise the debt ceiling and avert a potential US default scenario, according to Abrdn's James Athey.

In an interview with Bloomberg on Monday, the Abrdn investment director pointed to ongoing talks between President Biden and lawmakers, who are still sparring over the conditions to raise the country's borrowing limit.  

The White House and member of Congress will likely reach a deal before the US defaults on its debt, Athey said, but a solution will probably involve spending cuts, which will be a headwind for equities. 

"Almost by definition you need to see something given to the Republicans to get them on board, and of course that's likely to take the form of spending cuts, and that's a gross headwind, which I don't think is at all baked into markets at the moment," he said. "I think we get a deal, I don't think anyone is delighted about it, but everyone's somewhat satisfied. But I think there is still downside risk to equity and bond yields on the fact that it's likely to be impeding growth going forward." 

President Biden, House Speaker Kevin McCarthy, and other congressional leaders are expected to resume debt ceiling negotiations on Tuesday. McCarthy has said he would reject any short-term debt ceiling increase without negotiating government spending cuts, though experts say that's likely to crimp economic growth.

McCarthy's proposed bill, which slashes around $4.5 trillion in government spending, would likely result in recession, Moody's chief economist warned.

Congress now has a little over a week to raise the national borrowing limit before the US could potentially default on its obligations, which could include missing payments on some of its $31 trillion mountain of debt. Experts have warned that such an event would be a catastrophe for markets and the economy. Stocks could crash 45%, the White House Council of Economic Advisers estimated, rivaling the crash seen around the 2008 recession.