— Existential crisis averted (a tentative debt limit agreement) … a new (old) crop of negatives emerge.
— Congress may balk as deadline approaches … or what about the employment numbers this week, inflation, the next Fed meeting or, horrors, a recession?
— A return to the Covid playbook (without the Covid) — sell Economic sensitivity, buy growth.
— The market continues to march to a different drummer.
Consider the barrage of negative commentary that appeared this past weekend after White House and Congressional negotiators hammered out an agreement on raising the debt ceiling. What if the Republicans balk or the Democrats throw a hissy fit over the debt ceiling agreement. This could drag on for weeks, putting a potential catastrophic default back on the table. I wrote about why a default would not happen May 15 (Debt Ceiling: The Great Distraction) and that it was distracting investor attention from a great number of positives on the economic front. We must have done something very bad to deserve this ongoing stream of worry and concern.
The barrage of “what ifs” continues
What if more extreme members on both sides of the aisle oppose the bill not allowing it to move forward to the Senate? There may be opposition but not enough to keep it from being passed out of the House Ways and Means Committee this afternoon. According to CNBC it is could be teed up for a vote as early as Wednesday evening. Neither Speaker McCarthy or Minority Leader Jeffries would likely put this important legislation to a vote without a thorough positive vote count in hand.
What if Friday’s employment numbers come in hot? What if May inflation data comes in hot, also raising the Fed’s angst over inflation? Yup, could happen and the Fed may take further action raising rates, moving us along the path to the RECESSION that has been just around the corner but never seems to come.
The above list of worries has been front and center in the media spotlight ever since it became apparent Mssrs. Biden and McCarthy had a workable debt ceiling deal done. The media knows exactly what they are doing. For some reason people like scary movies. I guess being frightened is entertaining. You can see the uptake of this fear in the market.
A return to the Covid playbook (without the Covid)
When Covid-19 hit this country everyone knew that the lockups would kill the economy so there was a mad rush to sell everything economically sensitive, putting the money into high quality dependable large cap companies and tech. Investors sold small cap because those companies were considered to be vulnerable in hard times. They sold leveraged balance sheet companies even though they had secure cash flows simply because debt is not desirable in tough times. The sold anything remotely thought to be sensitive to the economy and poured the money into tech and innovation.
We seem to be seeing the same phenomenon, though not as violent, today. NASDAQ with its heavy tech weighting is up 24%, year to date. The Dow Jones Industrials, with more cyclical exposure and a much smaller tech exposure, is flat. The small cap Russell 2000 is flat and down over 7% in the last 12 months. NASDAQ in the past year is up 7%.
I point this out as important because similar periods in the past have ended badly for tech while, at the same time, providing great entry points for the also-rans. These include the “nifty fifty” era of the ’70s, the Y2K tech bubble and the run in NASDAQ that ended in November 2021. If you have money to invest there may be more fertile areas away from that which is’ hot now’.
The market marches to a different drummer
Despite all the hand-wringing about the debt ceiling, inflation, interest rates, Fed policy, the bank crisis and dreaded recession, the market, vis a vis the S&P 500, has done alright this past year. You may feel, based on what you read, see and hear, that it has done poorly. It hasn’t. It has taken a well-deserved rest. The S&P 500 had an intermediate peak last August at 4325.28. It closed Tuesday, May 30, at 4205.52, down only 119.76 (-2.77%). It is only down 13.7% from its record close January 4, 2022. It has tripled in the last 10 years. It is very hard to square these results with the daily media grind suggesting negative outcomes and caution. Just remember for the media (Boo birds) good news is not news.
What’s your take?