If Congress does not act, a debt-restriction confrontation with a possible government shutdown is imminent on Friday, October 1. In addition, Treasury Secretary Jellen warned in October that he would run out of cash and special measures if the debt cap was not lifted. The United States cannot issue any more debt unless the debt cap is raised. If no agreement is reached, the possibility of US debt defaults will be discussed in the news, but it is virtually certain that defaults will not occur. This debt cap debate is a political battle in which both sides think they can draw something from the other.
According to Strategas Research Partners, the federal government has raised about $ 4 trillion in revenue and interest costs are only $ 350 billion. The federal government can fund defense, veterans, Medicare, social security, and health programs with cash flow alone. If Democrats and Republicans cannot agree on terms to raise their debt caps, the federal government will eventually be forced to prioritize spending to avoid default and continue to repay US debt. In the end, Congress will raise its debt cap, but that may not happen before the government is forced to close for a period of time.
It is useful to look at past cases of government shutdowns, as additional uncertainty usually does not benefit stock market performance. Interestingly, the S & P 500 was typically high on average during the last 14 government shutdowns since 1980. In fact, the latest episode of 2019 showed solid returns, but was preceded by a 7% sale. Returns during the shutdown appear to be fairly subdued, but there is some evidence of volatility before and after the shutdown period.
However, the recent debt cap crisis leaves a more complex situation. In 2011, the United States took special measures on May 16 to begin repayment of debt and reached an agreement on August 2. Meanwhile, the S & P 500 fell almost -6%. Europe is in a debt crisis and economic growth is slowing, so it is unlikely that the debt cap is the only reason for the decline.
Temporary measures began on May 13, 2013, and an agreement was reached on October 17. During this period, the S & P 500 rose by almost 4%, although inventories fell by nearly -6% at some point during the period.
Investors need to prepare for more equity volatility if Congress fails to reach an agreement to raise debt caps this week and keep the federal government open. History does not provide a reason to sell shares due to an imminent debt cap confrontation or government closure. Instead, the decline caused by the conflict could be an opportunity for investors who want to increase their exposure. Many tax and spending bills can take until sometime in the fourth quarter, but Congress will continue to negotiate large tax and spending bills.
Covid infections continue to increase in the United States and many other countries, but lower rates of change indicate that the situation is beginning to improve. The momentum of infection in the UK seems to have peaked and continues to improve. After last week’s rebound, the rate of increase in US Covid cases finally recorded a significant decline. Japan peaked in late August and continues to improve.
As mentioned last week, the Federal Reserve did not change the policy rate. The updated dot plot shows that the Fed’s governor is evenly divided on whether there is a 2022 rate hike. The Federal Reserve Board has given a stronger signal than expected that an official announcement on the start of a reduction or tapering of bond purchases is likely to occur in November. Powell said most Fed members support the tapering that ends in mid-2022. This means a $ 15 billion monthly savings. Many market commentators saw the meeting as a bit more hawkish than expected, but the market did not respond negatively last week. The market is always worried about the premature decline in Fed accommodations that are choking the economy, and the yield curve that accurately predicted most recessions when 10-year U.S. Treasury yields fell below two years Approved by raising the Fed’s meeting. Bank stocks rose 3.1% due to this surge in the yield curve, as measured by the KBW Bank Index (BKX). Value stocks, which are usually more economically sensitive, also outperformed the week. US Treasury yields 18 months ahead show that next year and a half will have less than two rate hikes.