Financial Market Update
Welcome to the StrategicPoint Financial Market Update — a market and economic overview of what occurred last week and what’s up for this week. Please find our market commentary and most recent Blog posts in our StrategicPoint of View®.
Stocks ended April generally higher, despite several lackluster sessions along the way. Each of the benchmark indexes listed here gained ground over their March closing values, except for the small caps of the Russell 2000. Investors spent most of April weighing positive news on corporate earnings against concerns about the financial strength of regional banks and the Federal Reserve’s next move relative to interest rates as it continues to battle inflation. The Dow enjoyed its best month since January. The Global Dow and the large caps of the S&P 500 also gained at least 1.5%. The Nasdaq barely eked out a gain on the heels of a strong last week of April.
S&P 500: 4,169 (up 1.46% for the week and up 8.59% for the year)
NASDAQ: 12,226 (up 0.04% for the week and up 16.82% for the year)
Dow: 34,098 (up 2.48% for the week and up 2.87% for the year)
US Treasury 10yr: 3.45% (from 3.57% last week)
Crude Oil: $76.73 (from $77.76 last week)
Gold: $1,987.80 (from $1,933.70 last week)
USD/Euro: $1.0989 (from $1.09922 last week)
Market Commentary– StrategicPoint of View®
The U.S Department of the Treasury defines the debt limit as “the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds and other payments.” The US Treasury goes on to say, “Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents. Congressional leaders in both parties have recognized that this is necessary.”
As many people are aware, it is time, once again, to raise the US debt limit to cover existing obligations. The press has been reporting on the potential for a debt ceiling crisis, foreshadowing dire consequences if the debt ceiling is not raised before the “X date,” the date the government might actually default and not be able to pay what it has promised.
So, what might happen if the US defaults on its debt? The Brookings Institute notes that there is a large amount of uncertainty regarding damage a default would inflict on the economy, depending on how long the default lasts, how it is managed and whether it changes the world view of the safety of US Treasuries and other assets. However, the Institute did note “an extended impasse is likely to cause significant damage to the U.S. economy. Even in a best-case scenario where the impasse is short-lived, the economy is likely to suffer sustained—and completely avoidable—damage.” That is because an actual default would likely result in suspended payments for government benefits and wages, higher interest rates on borrowing such as mortgages, and greater costs on government debt obligations. A serious recession with global implications would not be out of the question.
It is important to note that the debt ceiling reflects spending that has been previously authorized by both Democrats and Republicans and does not reflect any plans for increased spending. Think of it as paying for bills and invoices on services already approved by Congress.
The Challenge – the National Debt and the Deficit
Few would argue that the United States doesn’t have a debt problem. (Total Public Debt as a percentage of Gross Domestic Product is 120% as of Q4 2022, according to St. Louis Federal Reserve. That is high.) The debt stems from a long history of fiscal policies geared towards increasing spending and lowering taxes. In recent history, the debt has been amplified by low interest rates and a Federal Reserve that has been willing to stimulate the economy during difficult times. While government stimulus is important to ameliorate certain hardships and keep the economy going – especially during recessions – it can also be overused in good times when it is not needed, thus magnifying debt issues.
Now, with high inflation and rising interest rates, many agree that it is time to address the deficit (the gap that occurs when federal spending exceeds revenues – requiring the government to borrow) and the debt (the cumulative amount of money the government has borrowed).
One way to address deficits is through the United States annual budget process. The annual budget process starts with the President of the United States issuing his plans for the budget, followed by the House of Representatives and the Senate issuing their own budgets. The budgets reflect allotted spending and the means to pay for spending, including tax policy. Negotiations follow and appropriation bills are passed. Once signed by the President, the budget is set. The deadline each year for budget approval is October 1st.
The problem is that the appropriations process is often messy, drawn out and at times nonfunctional, as evidenced by political recalcitrance, continuing resolutions (delays) and occasional government shutdowns. It is simply politically unpopular to cut spending and/or raise taxes, two tools that will likely be needed to bring the debt and deficits under control. All too often budget resolutions involve last-minute horse trading and voluminous bills that are anything but efficient and self-disciplined.
Given the disfunction in Congress of late, it is easy to understand the temptation to tie the debt ceiling to the appropriations process. How else to force constraints into the system? However, if Congress cannot agree on terms to raise the debt ceiling, the potential damage of an actual default would be devastating to the US economy, its citizens, and its standing in the world. It is a risk way too high to take. The debt ceiling limit was never meant to be part of the budgetary process, and should be kept separate, especially when there are other avenues to address the national debt. Yes, the appropriations process can, and should, be improved, and the Federal Reserve can and should apply its tools to help bring down the national debt. The focus should be on these two avenues.
Why do I mention all of this in a market commentary? Because sometimes the markets can help Washington do the right thing. It can be the messenger that translates and telegraphs the potential pain of not increasing the debt ceiling, thereby forcing Congress to act.
I don’t say this happily, and I hope it never happens, but I am giving everyone a bit of a heads up. If the markets decide to send Congress a message, that message would likely come in the form of increased volatility – a sharp decline in equities and a sharp increase in interest rates. Markets understand that a default would be very bad for stocks and bonds, and they are very good at expressing those fears.
For now, the equity markets are patiently waiting, not responding much to the noise in Washington. They, like us, are hoping the seriousness of the situation will compel Congress to do what it has always done – raise the debt ceiling. After that, we hope that the two sides will sit down and seriously negotiate future levels of spending and the means to pay for them.
What this means for you as an investor is that you may need both patience and a bit of a strong stomach this summer as Congress and the President are pressured to resolve the debt ceiling crisis and work towards fiscal responsibility. The good news is that event-driven volatility, as in this case, is usually fairly short-lived. It is not something to try to time, as news itself can be volatile and not predictable.
We are taking a longer view of our investments, sticking with our focus on the overarching economy and the tradeoffs between inflation and interest rate policy by the Federal Reserve. We are looking forward to the resolution of these issues and the beginning of the next business cycle. In the interim, we are monitoring our holdings and determining how best to position our portfolios for the challenges and opportunities that will play out in the coming months.
Betsey A. Purinton, CFP®
Co-Chief Investment Officer
On this episode of Novice and the nerd, Laura and Derek do a postmortem on the Silicon Valley Bank failure and how some of their issues could impact local banks in our area.
Market Commentary: Bank Fallout
Read our blog by Co-Chief Investment Officer, Betsey A. Purinton, CFP® on the fallout from recent bank closures.
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Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Third party content does not reflect the view of the firm or of our parent company, Focus Financial Partners. LLC and is not reviewed for completeness or accuracy. It is provided for ease of reference.
Parts of this report were prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2023. Part of this content contributed by Forefield, Inc.