To my clients:
It was a mixed week for North American stock markets with the Canadian TSX finishing down 0.3%; the U.S. Dow Jones Index up 0.4%; and the U.S. S&P 500 up 1.6%.
NOTE: I had a busy late morning/early afternoon today, so I typed this update early this morning. I added an edit due to developments throughout the day.
Driving better market sentiment this week is a topic I’ve steadfastly avoided the past few months: the U.S. debt ceiling limit. This issue comes up every handful of years and each time it gets resolved at the last minute. Frankly, as a Portfolio Manager, it’s annoying because it causes needless worry amongst clients who sometimes become alarmed by media headlines. That said, before getting to why sentiment improved this week, let me offer a quick background.
The self-imposed U.S. debt ceiling, established in 1917, sets a legally defined limit on how much the U.S. government can borrow to pay its bills. This limit has been reached and raised over one hundred times the past century. The debt ceiling often makes its way into the news when passing the required legislation is expected to be more difficult, typically when there is a divided government. This is the case today, with Congress divided between the Republicans who control the House of Representatives and the Democrats who control the Senate. The debt limit was technically reached earlier this year, but extraordinary measures have pushed the hard deadline to early June, according to Treasury Department estimates.
So with that as the background, this time around Republicans are citing a need for “budget renegotiation” (aka: spending cuts) before considering any increase to the debt limit. Meanwhile, the Democrats began negotiations with a firm “No” on any budget concessions and therefore refused to negotiate. This stalemate persisted for the past few months until, this week, both sides seemed to budge on their entrenched stances. Specifically, there have been some signs of potential compromise and progress in recent days, with negotiations taking place and Republican House Leader Kevin McCarthy saying yesterday that he saw a “path that we could come to an agreement.”.
It's difficult for me to imagine the U.S. failing to raise its debt ceiling limit and defaulting on its debt, and so I believe a deal will get done. But given the polarity of U.S. political discourse, I wouldn’t be surprised by setbacks along the way which may well reverse this week’s positive sentiment. We shall see. EDIT: indeed, a setback occurred mid-morning as Republicans walked away from negotiations and “hit pause” (per one negotiator) thereby turning what had been a positive market this morning into a negative one. There are sure to be other shifts in sentiment.
One other note: weekly jobless claims fell by 22,000 this week, after rising sharply the week before. Jobless claims are painting a bit of a muddy picture at present, but given its importance as a leading indicator of recession, I shall continue to monitor closely.
That’s it for this week. All the best,
Nick
Nick Scholte, CIM, FCSI
Senior Portfolio Manager
Scholte Wealth Management
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