“So put me on a highway And show me a sign And take it to the limit one more time”
Remember the Eagles song? It must feature prominently on our elected officials’ playlists, because no matter how dire the warnings, the game of brinkmanship continued last week. We keep getting closer and closer to hitting the debt limit without a workable resolution. So, what can happen? There are several scenarios that could play out here:
– A deal just under the wire. Phew! The stress will be alleviated, and we move on. There are reputational risks, but we will revert to more pedestrian discussions about the Federal Reserve and a potential recession.
– The fracas continues beyond the deadline, but an agreement is reached shortly thereafter. In this scenario, the markets will likely grow much more concerned, equities could decline and yields will most certainly rise. The government will have to prioritize who it will pay; without a debt ceiling increase, revenues will fall short of expenses. What that looks like is pure speculation, but it can run the gamut of missed or reduced salary payments to federal workers (including the military and veterans) to delaying contractors’ payments. In any case, it will increase the chances of a recession sooner rather than later.
– No deal is reached. This is the most disastrous scenario. In order for the U.S. not to default, it would have to divert dollars to service debt and interest on the money borrowed so far. When it comes to refinancing, we would have to pay even higher rates, which would make the cycle even worse. Who would suffer? Social Security and Medicare recipients and anyone paid by the government are all possibilities. This third scenario would put us into recession, while the dollar, bonds and stocks would plummet. This scenario is almost too mind-boggling to contemplate.
Thankfully, a deal between President Joe Biden and House Speaker Kevin McCarthy has been reached; taking it to the limit, indeed. The agreement raises the debt ceiling for two years, extending it past the 2024 election. As the deal made its way through Congress yesterday, it appears bipartisanship prevailed, and the debt ceiling will be raised as it has over 100 times since World War II. Events such as these underscore why we seek to construct portfolios that will hold up well over the long term, regardless of short-term market conditions. The market’s relatively muted response to the deal earlier this week is also a reminder that the collective wisdom of markets does a very good job of incorporating all available information and estimating the odds of future events.
The Federal Reserve will meet June 13-14, and markets are uncertain about whether the Fed will keep rates unchanged or hike rates by another 0.25%. Fed funds futures are suggesting a roughly 70% chance that the Fed will keep rates unchanged at their next meeting.
Stocks continue to do well despite negative headlines about a potential recession, the banking sector and debt ceiling fears. Year to date, the Russell 3000 is up over 8% while the MSCI World ex-USA is up nearly 5%, driven largely by large-cap and tech stocks. The yield on a two-year Treasury is up to 4.5%, which is the highest it has been since prior to Silicon Valley Bank’s failure on March 10.
Coming this week
Debt ceiling talks will likely continue to dominate markets until a deal is finalized.
On Tuesday, we’ll get the latest consumer confidence numbers. Bond auctions are also scheduled.
Thursday will bring more bond settlements and auctions. We’ll also see the Challenger job-cuts report as well as the ADP employment report. (Last month’s reading was +296,000.)
Finally, the Bureau of Labor Statistics will release the May nonfarm payroll numbers. The last reading was +253,000, and the Fed wants to see this number softened significantly.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed adequacy of this information. Indices are not available for direct investment.
Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
The information and opinions contained herein, provided by third parties, have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by FirstLine Financial.
This information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. None of the information contained herein shall constitute an offer to sell or solicit any offer to buy a security or insurance product.
The Week in Review: May 21-27
Take it to the limit – one more time!
“So put me on a highway
And show me a sign
And take it to the limit one more time”
Remember the Eagles song? It must feature prominently on our elected officials’ playlists, because no matter how dire the warnings, the game of brinkmanship continued last week. We keep getting closer and closer to hitting the debt limit without a workable resolution. So, what can happen? There are several scenarios that could play out here:
– A deal just under the wire. Phew! The stress will be alleviated, and we move on. There are reputational risks, but we will revert to more pedestrian discussions about the Federal Reserve and a potential recession.
– The fracas continues beyond the deadline, but an agreement is reached shortly thereafter. In this scenario, the markets will likely grow much more concerned, equities could decline and yields will most certainly rise. The government will have to prioritize who it will pay; without a debt ceiling increase, revenues will fall short of expenses. What that looks like is pure speculation, but it can run the gamut of missed or reduced salary payments to federal workers (including the military and veterans) to delaying contractors’ payments. In any case, it will increase the chances of a recession sooner rather than later.
– No deal is reached. This is the most disastrous scenario. In order for the U.S. not to default, it would have to divert dollars to service debt and interest on the money borrowed so far. When it comes to refinancing, we would have to pay even higher rates, which would make the cycle even worse. Who would suffer? Social Security and Medicare recipients and anyone paid by the government are all possibilities. This third scenario would put us into recession, while the dollar, bonds and stocks would plummet. This scenario is almost too mind-boggling to contemplate.
Thankfully, a deal between President Joe Biden and House Speaker Kevin McCarthy has been reached; taking it to the limit, indeed. The agreement raises the debt ceiling for two years, extending it past the 2024 election. As the deal made its way through Congress yesterday, it appears bipartisanship prevailed, and the debt ceiling will be raised as it has over 100 times since World War II. Events such as these underscore why we seek to construct portfolios that will hold up well over the long term, regardless of short-term market conditions. The market’s relatively muted response to the deal earlier this week is also a reminder that the collective wisdom of markets does a very good job of incorporating all available information and estimating the odds of future events.
The Federal Reserve will meet June 13-14, and markets are uncertain about whether the Fed will keep rates unchanged or hike rates by another 0.25%. Fed funds futures are suggesting a roughly 70% chance that the Fed will keep rates unchanged at their next meeting.
Stocks continue to do well despite negative headlines about a potential recession, the banking sector and debt ceiling fears. Year to date, the Russell 3000 is up over 8% while the MSCI World ex-USA is up nearly 5%, driven largely by large-cap and tech stocks. The yield on a two-year Treasury is up to 4.5%, which is the highest it has been since prior to Silicon Valley Bank’s failure on March 10.
Coming this week
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed adequacy of this information. Indices are not available for direct investment.
Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
The information and opinions contained herein, provided by third parties, have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by FirstLine Financial.
This information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. None of the information contained herein shall constitute an offer to sell or solicit any offer to buy a security or insurance product.