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Trading on a US Default: A High-Stakes Game Investors Should Sidestep, Advises Bankrate Analyst

Investing in anticipation of a potential US default is a risky and unwise strategy, advises Mark Hamrick, Senior Economic Analyst at Bankrate. Investors looking to reposition their portfolios or select specific assets based on a potential debt-ceiling stalemate are entering a zone of high uncertainty due to the lack of historical precedents.

The political tug-of-war in Washington over the $31 trillion debt is venturing into unexplored territory. Hamrick’s sage advice to investors navigating these turbulent waters? Keep a long-term perspective on markets.

“The challenge of attempting to trade around this situation or make unique investment decisions specific to this scenario is that it requires near-impossible precision in timing,” Hamrick explains. “Investors would need to correctly time their exit from the market or reduction of exposure to certain assets, including equities, and then nail the timing to reenter.”

With Treasury Secretary Janet Yellen warning that a default could occur as early as June 1, and lawmakers still at a stalemate on raising the debt ceiling, financial markets are on edge. Hamrick warns that a default would not only be catastrophic for the economy but could also trigger unprecedented consequences, making regular investment assumptions untenable.

Drawing parallels with the 2008 financial crisis, Hamrick recalls how many investors who attempted to time trades around the turmoil ended up getting singed. Those who exited the market at the time grappled with the right timing to make a re-entry.

“The most prudent course of action for the majority is to maintain a long-term view,” Hamrick emphasizes. “This includes adhering to sound financial practices, such as maintaining adequate emergency savings.” He also noted the current attractive yields of high-yield savings accounts, which are a viable option for capitalizing on the rising interest-rate environment.

Investors are not only grappling with the uncertainties surrounding the debt ceiling talks but also confronting an increasingly uncertain economic climate. Warning signs are flashing across the economy, in sectors such as manufacturing and housing, and recession risks are escalating.

The status of the US dollar is another burning question, with countries like Russia leading a de-dollarization movement over the past year. Hamrick believes a US default could exacerbate the greenback’s already shaky standing.

“If the full faith and credit of the US are undermined, it’s conceivable that this could negatively impact the credibility of the dollar,” he notes. While he doesn’t foresee the dollar losing its status as the world’s reserve currency in the near future, he does anticipate an increase in uncertainty and volatility around the asset in the event of a default.