It's the debt ceiling, stupid

The government shutdown, now in its ninth day, hasn't dented investor confidence, but if Congress fails to reach a solution before the country hits its debt ceiling, confidence could slump to record lows.

According to The Center for Audit Quality, investor confidence in U.S. capital markets reached a four-year high of 69% just two months ago.

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And while a follow-up “pulse” survey after the government shutdown began Oct. 1 showed that number holding steady, confidence would fall to 60% if the shutdown extends another week.

Most notably, the survey found that confidence would plummet to 39% if Congress does not raise the federal borrowing limit and the U.S. defaults on its debt.

“We really found that a remarkable, sobering number,” said Cindy Fornelli, executive director of the CAQ. “I think that would be a real travesty if we let the confidence erode over the debt ceiling.”

The CAQ hosted a panel Wednesday with investment experts from The Motley Fool, University of Maryland, Politico and Korngold Consulting LLC. The group suggested that if investors' confidence wanes, it will do so because of the fear of the unknown and potential volatility in the stock market.

“Some of the experts on the panel posited that people have seen a government shutdown before, but this will be the first time that we have exceeded the debt ceiling,” Ms. Fornelli said. “I think people fear that it'll be … a double whammy.”

The center has been conducting investor confidence surveys since 2007, when confidence in U.S. capital markets reached a high of 84%. The study reported its lowest point at 61% in 2011. Last year, that edged up to 65%. And in 2013, investor confidence grew another four percentage points.

Investors reported a seven-year high of their faith in publicly traded U.S. companies this year, with 79% reporting confidence in the sector.

If Washington can resolve the two major fiscal issues it faces, Ms. Fornelli said she expects investor confidence to continue to rise in 2014.

“I see no reason why investors wouldn't continue to be confident in our markets,” she said. “We've seen a steady trend over the last three years.”

Investors are much less confident in markets outside of the U.S. but that confidence is