- The debt-ceiling deadlock could put investors in a can't-win situation, according to Morgan Stanley.
- The standoff may be a "a lose-lose event for markets," chief US equity strategist Mike Wilson said.
Investors face a can't-win situation no matter how the debt-ceiling deadlock in Washington ends, according to Morgan Stanley's Mike Wilson.
The bank's chief US equity strategist indicated Monday that he agreed with clients' view that the ongoing standoff is "a lose-lose event for markets", with stocks suffering due to either heightened volatility or a future slowdown in spending.
"Assuming the debt ceiling is not resolved before the x-date, volatility is likely to accelerate near-term," Wilson wrote in a research note, referring to the date the government runs out of cash.
"Conversely, if the debt ceiling is lifted before the x-date, it will likely come with some concessions on the spending front which is likely a headwind for growth down the line," he added.
The debt ceiling is a limit on how much the US government can borrow, set by Congress.
Republicans, who control the House of Representatives, have said that they won't vote to lift the $31.4 trillion ceiling hit by the US on January 19 unless the Biden administration agrees to future spending cuts.
Many investors believe that the potential crisis will be resolved – and see any compromise as a preferable outcome to the US failing to repay its debts, which policymakers like Treasury Secretary Janet Yellen have warned would lead to economic chaos.
But even in that scenario, the Republicans' proposed spending cuts would still be bad news for stocks because they'd fuel a future economic slowdown, Wilson said.
The Treasury would also likely respond to a lifting of the borrowing limit by issuing more bonds to start raising money to repay its debts – and investors piling into those would mean they had less cash to spend buying stocks, he added.
"Such an outcome would also lead to significant, pent-up issuance from the Treasury to rebuild its general account and pay its bills," Wilson wrote. "Our rates team thinks the issuance from Treasury would be significant in the six months following the debt ceiling being lifted."
"That would potentially present a material tightening to liquidity that could tip the S&P 500 back to the downside given the index's sensitivity to changes in liquidity in recent history," he added.