The actions of the Federal Reserve have been driving markets for the better part of the year, but investors may need to shift their focus up the road to Capitol Hill this summer, according to Goldman Sachs. The US government hit its debt limit earlier this month, starting a countdown to when the Treasury Department will run out of resources. Goldman chief economist Jan Hatzius said in his “Weekly Kickstart” note that the looming debt ceiling fight this summer could have a significant impact on stocks. “Our economists expect the deadline to raise the debt limit will arrive between June and October. Market reactions to past debt limit episodes have been mixed. This year has some similarities to the 2011 episode in which the S & P 500 declined by 17% peak -to-trough. However, most episodes have had a limited impact on equities,” Hatzius said. Hatzius’ Goldman colleague Alec Phillips said in a follow-up note that, “we continue to believe the risk that Congress fails to raise the debt limit by the deadline is higher than at any point since 2011.” Time will tell if this debt limit fight proves to be as damaging as the one more than a decade ago, but one group of stocks could be in for a rough patch even if a last-minute deal is reached. Goldman’s basket of “government exposed companies” includes names with at least 20% of their revenue tied to government spending. The group is primarily made up of defense contractors, health care names and business services companies. History shows that the rising odds for a government shutdown hurt these stocks. “The basket has lagged the broader S & P 500 by a median of 5 [percentage points] in the weeks ahead of the four most recent debt limit deadlines, lagging in three of those episodes,” Hatzius said. Some of the companies in the basket with the most government revenue exposure include defense contractors Huntington Ingalls and Lockheed Martin, consulting firm Booz Allen Hamilton and Oak Street Health. Hatzius also pointed out that the basket has been underperforming the broader market this year, so the debt ceiling fight may already be making an impact. — CNBC’s Michael Bloom contributed to this report.
