Daily Stock Market Articles

11 Things To Know About The Debt Ceiling
Posted on May 9, 2023

“I don’t make jokes. I just watch the government and report the facts.”

– Will Rogers

One of the top questions we’ve received lately has to do with the impending debt ceiling drama and what it could all mean. Here are some common questions and answers regarding this excitement out of Washington.

• What is the debt ceiling? Simply put, it is how much money our country has to pay the bills, authorized by Treasury Secretary Janet Yellen and the Treasury. This is one of those weird ways in which government functions. Congress typically authorizes spending bills, which the President signs into law. Historically, this spending has exceeded government revenues, and Treasury issues debt to cover the deficit. However, there is a “ceiling” to how much total debt Treasury can incur. Congress typically has to pass a second bill authorizing the ceiling to move higher, so that Treasury can pay for spending that was already passed into law. Not raising the debt ceiling is akin to going to a restaurant, ordering and eating the food, and then walking out without paying the bill.

• What is paid from this? Medicare and Social Security are two of the big ones. But tax refunds, military salaries and interest on national debt are also part of the current $31.4 trillion debt ceiling.

• How common is a debt ceiling increase? Very common is the short answer. The first time it was used was in 1917 to help finance World War I and has happened more than 100 times since. In fact, every President back to Eisenhower has increased the debt ceiling, for a total of 89 times since 1959. President Biden has increased it twice already, which is the least number of times any President has increased it going back 11 Presidents.

• What happens if the current debt ceiling isn’t increased? In theory the U.S. would default on their debt, meaning they’ve run out of money and can’t pay the bills. We do not expect this to happen, and it has only happened once in history, in 1979, but that was more of a clerical error and was fixed rather quickly. Janet Yellen recently said it needs to be increased or such a failure would lead to a “steep economic downturn” in the U.S.

• Who else does it this way? The only two countries who have a debt ceiling and require the Government to vote on it and set the limits are the U.S. and Denmark. That’s it. Nearly all other countries set things as a percentage of their GDP. Why does this U.S. choose to do it this way? This one may be out of my paygrade, but I think it could have something to do with why we like our political theater here in the U.S.

• When will the U.S. run out of money? This is known as the ‘X date’, when the U.S. will run out of money. No one knows this exact day, but Janet Yellen recently said it could be as early as June 1, well before when some of the well-known investment banks were forecasting. Sometime in June seems to be the most widely expected timeframe.
• What options does Congress have? They could do nothing and potentially let the U.S. default, while they could also raise the $31.4 trillion debt ceiling. Another option is Congress can suspend the debt ceiling, something they did seven times since 2013, including as recently as August 2019 to July 2021. President Biden has invited the major members of Congress (Chuck Schumer, Mitch McConnell, Kevin McCarthy, and Hakeem Jefferies) to the White House today (May 9) to discuss and find a resolution.

• What about the makeup of Congress? Speaking of Congress, the debt ceiling has historically been increased whether we’ve had a Democratic, Republican or split Congress. Majority of the time, debt ceilings have been raised when Democrats have full control, though that’s because they were in the power majority of the time since 1959. Specifically, when we have a split Congress (like right now, with a Democratic Senate and Republican House), the debt ceiling has been increased 24 times. So, history says that a split Congress shouldn’t be an impediment to raising the ceiling yet again.

• How likely is a deal? Sonu put together this great SWOT analysis of President Biden and Speaker McCarthy, with some help from Punchbowl News. The Carson Investment Research team’s base case remains that there’s a big disconnect between the two sides right now, but the opportunity is there for some dealing with a final deal before the clock strikes midnight after the final posturing. Ultimately, it’s in neither President Biden’s or Speaker McCarthy’s interest to see a default, and potential economic catastrophe, under their watch.

• What happens if they let the U.S. default? We’d like to stress this is not the base case and we fully expect cooler heads to prevail, but should the U.S. default on its debt (meaning they miss a bond payment to holders of Treasuries) the chances greatly increase of much higher interest rates, a likely recession, and extreme market volatility. Many investors remember back in the summer of 2011 when both sides had trouble agreeing on a new debt ceiling and S&P downgraded the debt on the U.S., causing nearly a 19% decline in the S&P 500 over the following week.

• What do most of the experts think? Most political experts we follow expect the debt ceiling to be increased before X date, making it 90 increases since 1959. This is Washington after all and everyone has an agenda, but we don’t expect the current members of Congress want to be blamed should the U.S. default on its debt, causing a major drop in the stock market and potential recession right ahead of an election year.

So there you have it, 11 things to know about the current debt ceiling drama. We are a long way from a resolution and this will likely be all over the news the coming weeks, but in the end, we think the football will be punted once again.

 

Stocks Love Day Before Mother’s Day Better

With just a few days until Mother’s Day, this is also a reminder. Always used to plant flowers with mom and pick the fresh blooming lilacs. Over the last 28 years on the Friday before Mother’s Day Dow has gained ground 19 times. On Monday after, DJIA has advanced 17 times. Average gain on Friday has been 0.26% and 0.23% on Monday. However, Monday following Mother’s Day has been down 8 of the last 11 years. In 2019, DJIA suffered its worst post Mother’s Day loss going back to 1995, off 2.38%.

 

7 Questions About Regional Banks
Posted on May 11, 2023

There are so many questions that we get from our advisors and clients about the regional banking crisis, in addition to the debt ceiling (which Ryan covered in another blog). Here’re some answers to some of the common questions.

What is happening with regional banks?
The crisis erupted with Silicon Valley Bank (SVB) in early March. SVB hit the end of the road with a classic run on the bank, i.e. depositors rushing out the door, even as the bank’s asset values had deteriorated due to long-term bond holdings that lost value as interest rates surged over the past year. The FDIC eventually took over the insolvent bank, along with Signature Bank and First Republic (in late April). So regional banks have been under pressure over the past 2 months, as investors extrapolated some of the problems that plagued the three troubled banks to others.

Then last week saw renewed selling pressure on regional bank stocks. On May 4th, PacWest Bancorp fell 51.6% and Western Alliance Bancorp fell 41%. The SPDR S&P Regional Banking ETF (KRE) fell 7.2% just on that day. Now, as you can see in the chart below, there’s been quite a recovery since then, but prices are still down significantly since the crisis started. The KRE ETF is down almost 34.6% since March 8th, when the crisis started.



Why are small bank stock prices still under pressure?
It helps to understand how a bank works. They make money by borrowing money from depositors (yes, when you put money in a bank, you’re lending money to it) and lending money to consumers and businesses. The difference between the interest rate they charge borrowers and the rate they pay depositors is their “net interest margin” (NIM), or profit. Right now, the fear is that profitability has reduced as banks, especially smaller ones, have to increase the rates they pay depositors to keep them from fleeing. However, what’s important to know is that reduced profitability is different from insolvency, which is what happened to the 3 banks that went under.

What’s different from SVB and some of these other regional banks?
The main problem for SVB was that more than 90% of their deposits were uninsured. When news spread that their assets were impaired, and they were looking to raise capital, these depositors fled as they were worried that they wouldn’t get their money back. We wrote about it in depth at the time.

In contrast, banks like PacWest and Western Alliance have a much smaller percent of deposits that are uninsured (about 25%) – making them potentially less prone to a run.

So why did the stock prices for these banks crash on May 4th?
As I wrote above, there doesn’t appear to be any fundamental solvency issues with these banks, other than perhaps reduced profitability. Instead, what happened last week was driven by stock market speculation. Case in point, short selling and put option activity on PacWest and Western Alliance surged recently. Put options allow investors to profit from lower stock prices. In this case, market makers and dealers who sold these positions were “long” stocks and had to hedge that by shorting. This pushed prices lower, and eventually led to dealers having to sell even more shares short, especially as investors bought even more puts.



Wait, is this something like the meme stock frenzy?
In a sense, yes. If you remember, back in early 2021 stock prices for meme stocks surged on speculative activity, particularly call option buying. Dealers who sold these options were essentially “short” the stock. So, they had to hedge to be directionally neutral, which they did by buying stock, pushing prices higher. And as the social media frenzy picked up, prices surged as dealers had to buy even more stock.

I made the following schematic to illustrate what happened with regional banks last week. Now historically bank runs have been triggered by news events, and that can potentially happen a lot quicker these days because of social media. Speculators were betting that the bank in trouble will see deposits flee, and eventually be taken over by the FDIC, an event that would wipe out shareholders and result in profits for investors betting on these bank stock prices crashing. The good news is that the negative feedback loop was broken pretty quickly.



Could this be the canary in the coalmine, and can the crisis spread?
Never say never in the investment business. But one big sign that trouble is not spreading is that banks are not accessing the Federal Reserve’s (Fed) liquidity facilities to the extent they were a few weeks ago. Loans to banks via the Fed’s facilities are at the lowest level in 7 weeks. There are three pieces here:

• Lending to FDIC depository institutions (yellow bar in the chart below) – These are loans extended to banks that were subsequently taken over by the FDIC, like SVB, Signature and First Republic. This increased in the latest data because First Republic was just taken over.
• Discount window (dark blue bars) – Banks can use this to access liquidity in exchange for collateral (like US treasuries). It’s fallen from $153 billion to $5 billion over the last month, which is close to where it was before the SVB crisis.
• Bank term funding program (green bar) – This is a new facility that the Fed set up in March after the SVB crisis. Banks can access liquidity here by exchanging securities at their full par value. This has dropped from a peak of $81 billion to $76 billion, which is a very positive sign.

Another positive sign: the latest data from the Fed shows that deposits at small commercial banks in the US have stabilized over the past month. Deposits at these banks cratered over the two weeks after the SVB crisis, and the worry was that this would continue.



Will there be a broader economic impact, due to a credit crunch?
The latest Fed survey of loan officers from showed that banks tightened credit at the start of the second quarter. However, the net percent of survey respondents saying they tightened standards for commercial and industrial loans did not increase significantly, rising from 44.8% in January to 46% in April. But here’s the other side of that: 54% said that standards “remained basically unchanged”.



Make no mistake, credit standards have tightened over the past year. But that was already the case before the SVB crisis, and it really hasn’t had much of an impact on the economy as we saw from the recent GDP growth data for Q1.

Note that banks are still making loans. In fact, bank lending is up 8.5% over the past year – it was running at a pace of around 5% before the pandemic. Now a big part of that is due to inflation, as higher prices mean loans are larger. But bank lending doesn’t look to have completely collapsed.



Ultimately, what is important with respect to the current economic expansion (since 2020) is that this is NOT a credit driven cycle. This contrasts with the late 1980s, late 1990s and mid-2000s. During those periods, credit growth drove business and real estate investment, and consumer spending. Eventually, when losses on loans spread, credit was pulled back and the economy went into a recession.

Right now, economic growth is being driven by strong incomes, because of strong employment and wage growth. And so far, there’s no reason to believe that will not continue.

 

May Monthly OpEx Week Weak - DJIA Down 12 of Last 14

May’s monthly option expiration has been mixed over the longer-term since 1990. DJIA has been up eighteen of the last thirty-three May monthly expiration days with an average loss of 0.07%. Monthly OpEx week has a slight bearish bias with DJIA and S&P 500 down 18 and up 15.

More recently, DJIA has suffered declines in 12 of the last 14, monthly expiration weeks. S&P 500 has one additional weekly gain since 2009, down 11 of the last 14. NASDAQ has declined in 9 of the last 14. The week after has been best for S&P 500 and NASDAQ.

The week after options expiration is more bullish with S&P and NASDAQ up 11 of 14. Last year DJIA, S&P 500 and NASDAQ all gained over 6% in the week after.

 

NY Fed Plummets
Mon, May 15, 2023

The economic calendar was light this morning with the Empire Fed Manufacturing survey the only release of note. Whereas last month saw a solid reading of 10.8 implying expansionary activity in the NY Fed's region, expectations were set low as the index was forecasted to fall down to a contractionary reading of -3.9. Instead, the index plummeted all the way down to -31.8, the lowest since January when the index reached a slightly worse -32.9. Additionally, the monthly decline in the headline number ranks as the second largest drop on record behind April 2020. Overall, the index has been quite volatile in recent months bouncing from historically contractionary readings to modest contraction or even growth.



As shown below, the month-over-month declines across many categories were nothing short of historic in May. For example, New Orders saw an astounding 53.1 point decline (just short of a record decline similar to the headline index). Shipments wasn't much better with a 40-point decline. However, expectations for both of those categories rebounded with New Orders being a particularly big uptick, ranking in the upper decile of all month-over-month increases. That being said, the indices remain in the bottom deciles of their historical ranges while all other categories (like unfilled orders and inventories) saw declines in expectations alongside declines in current condition indices. Again, while recent months have seen some volatility in these survey results, the findings would imply responding firms have observed a significant slowdown in their businesses.





One silver lining relative to post-pandemic trends is that the report has shown a complete reversal in readings on prices and delivery times. As shown in the first chart below, the average of the two current conditions indices has been rolling over and is now basically right in line with the historical median. Balancing out the more normalized level in supply chain readings, firms also appear to be reporting massive pullbacks in hiring capital expenditures, and plans for tech spending. During the past two recessions, this average has turned negative, and at the moment, it is only barely positive at 3.43.

 

Midway through May, DJIA Logs its Second Daily Gain

As of today’s close, May has been trading consistent with it historical seasonal pattern, weak and choppy. DJIA, S&P 500, Russell 1000 and 2000 are all in the red. Today’s modest 0.14% gain by DJIA was just the second daily gain this month and it is now down 2.20% for May. NASAQ is up 1.13% and is the only index with a gain in May. With no progress being made on the debt ceiling, the market is likely to continue to trade sideways. Historical strength over the last four trading days in May is the lone bright spot over the last 21-years.

 

Homebuilders Sentiment and Stocks Still On the Rise
Tue, May 16, 2023

As we noted last week on the release of the latest mortgage purchase data, housing activity appears to have finally stabilized after plummeting earlier in the tightening cycle. That improvement in housing markets is flowing through to builders as this morning's release of homebuilder sentiment from the NAHB rose to 50 versus the expectation of it remaining unchanged at 45. While the index still has a long way to go to get back to pre-pandemic levels, let alone the record highs from the first two years of the pandemic, in May it hit the highest level since last July.



The higher reading in the headline index was a result of improvements across the board, including increases in present and future sales and traffic. As for regional sentiment, homebuilders have gotten more optimistic across most of the country. Everywhere save for the Northeast have seen steady improvements to homebuilder sentiment over the past several months. As for the Northeast, that is not to say sentiment has not improved. The reading has rebounded off of the worst levels but remains below the recent highs of 46 from February and March.



Homebuilder stocks continue to be even more impressive. Proxied by the iShares Home Construction ETF (ITB), homebuilders have been trading in a steady and uninterrupted uptrend. In fact, the ETF has been overbought every day for a month now.

 

NASDAQ Outperforming DJIA By Most since 1991

After being the best performing index last year (by declining the least), DJIA’s laggard performance in 2023 continued today. Home Depot’s disappointing forecast earlier today only added further pressure on DJIA. As of today’s close, the 12th trading day of May, DJIA is negative for the year, down 0.41%. NASDAQ, however, is up 17.93% thus far this year. This gives NASDAQ an 18.34% advantage, it’s second biggest lead at this point of the year since 1991 when it was ahead by 18.99%. We would not be surprised to see NASDAQ to continue to lead the way as it still has the rest of May and June remaining in its “Best Eight Months,” November through June.

 

We Now See a Path to Lower Inflation
Posted on May 16, 2023

April’s CPI inflation data came in at expectations. Headline inflation rose 0.4% and is now up 4.9% over the past year. That is well below the peak rate of 9.1% last June. The big picture is inflation has already pulled back in a big way. That is primarily because of lower energy prices, and a welcome decrease in food prices. Used car prices rose in April but have been on a downtrend since last summer, contributing to the pull back in inflation. New car price inflation appears to be easing now, too, with prices falling for the first time in two years.



Excluding food and energy, “core inflation” is now running higher than headline inflation, at 5.5% over the past year. That’s not far below last summer’s peak of 6.6%, and so the pullback in headline inflation hasn’t quite translated to the core measure. Core inflation is also what the Federal Reserve (Fed) typically focuses on, and from that perspective, inflation remains well above the Fed’s target 2% rate.

Housing inflation is turning around
The main reason behind elevated core CPI inflation is housing inflation, which makes up 41% of the basket. Housing inflation, which is basically derived from rents (as opposed to home prices), has been running hot, around 8-9% over the past year.

This is in sharp contrast to market-based rental price measures, which have shown a sharp deceleration in rents over the past year. Apartment List’s national rental index peaked at 18% about 18 months ago, but that has decelerated to a 1.7% pace as of April. The official shelter index clearly has a significant lag to this market-based index. But here’s the good news: The official data looks to be at a turning point.



On a month-over-month basis, rents had been increasing at an average rate of more than 0.7% between June 2022 and February 2023. But that has decelerated to an average rate of about 0.5% over the last two months, which is a very positive sign. However, as the chart below shows, that’s still higher than 2018-2019 when monthly increases averaged about 0.3%.



In short, the official housing inflation data is decelerating, but there’s still some ways to go. We’re likely to get closer to the pre-pandemic pace as we move into the second half of 2023, and that will also pull core inflation lower.

Producer Prices – There and Back Again
The producer price index (PPI) measures the prices that domestic goods and service producers receive. The index surged at a 12% annual pace back in March 2022, indicating wholesalers faced significant cost increases for the goods they bought from domestic producers. Which as we know, was passed down to consumers.

The good news is that we’ve come a long way over the last year. PPI rose just 2.4% over the 12 months through April, a pace that is similar to what we saw before the pandemic.



PPI is kind of a forward-looking indicator for consumer prices and perhaps more importantly, some its underlying components directly feed into the Fed’s preferred index for inflation, the personal consumption expenditure index. Based on the latest CPI and PPI data, forecasters at Goldman Sachs now expect PCE inflation to increase 0.3% in April, or 4.2% from a year earlier. Excluding food and energy, “core PCE” is expected to rise just 0.3% in April, corresponding to a year-over-year rate of 4.6%.

This would be a very positive development, as it would alleviate the Fed’s concerns about inflation picking up speed and bring an end to the aggressive cycle of interest rate increases that began just 14 months ago, with rates rising by 5 percentage points.

 

Four More Reasons the Bulls Are Smiling
Posted on May 17, 2023

Last month, I wrote about some bullish events taking place in Three More Bullish Signals The Bears Don’t Want To See, and it was a very popular blog. Well, today, I’ll take it one more step and list four new reasons the bulls will continue to smile.

We think the Fed is likely done hiking
With inflation coming down quickly, we are in the camp that the Fed is likely done hiking rates. You can read more about what Sonu had to say about the recent inflation data here.

One clear sign the Fed is indeed done is that the upper limit of the Fed Funds rate is now up to 5.25%, which is finally more than year-over-year CPI, which is 4.9%. As you can see below, the previous eight hiking cycles needed this ingredient before the Fed was done, and we are now there.



What if they are indeed done? I wrote about this in The Last Hike?, but the bottom line is stocks tend to do quite well, higher a year later eight out of 10 times and up a very impressive 14.3% on average. I keep hearing on tv how it is bearish once they stop hiking, but the data just doesn’t show that.



Stocks aren’t loved
We’ve noted many times in the past six months that one reason to expect higher equity prices was that the masses keep betting on lower prices. This matters as the crowd is rarely right looking back at history. I wrote about this more in Is Anyone Bullish Part 2.

Well, we have more data to support this in the form of a recent Gallup poll that asked what the best long-term investment would be. Wouldn’t you know it, stocks/mutual funds came in at the lowest level since 2011! Given how poorly stocks did last year and the constant barrage of negative news, maybe this isn’t a surprise, but from a contrarian point of view, this is another reason to think the path is higher for stocks.



Now is weak, but the future looks better
Some of the business and economic surveys we’ve seen lately have been weak, that is true, but what has our attention is that the future is looking better.

The New York Fed does some great work here, and a recent survey of Business Leaders showed that expectations for business activity six months from now were at the highest level since September 2022.

I find this worthwhile, as they focus on the New York and New Jersey area, in other words, the heart of the banking world. If most of these business leaders see better times coming, that is something the bulls should embrace.



Positive year-over-year … finally
Here’s a big one that just happened, and it has many bulls smiling.

The S&P 500 was negative year-over-year on a monthly basis for 12 consecutive months, but it just ended positive at the end of April (mainly thanks to the 9% drop in April 2022 dropping off). What does this mean? Well, we looked, and when previous long streaks ended, historically it suggested the bulls would start to have some fun.

As you can see below, the S&P 500 has never been lower a year later, higher eight out of eight times, with a very impressive 15.3% average return. Yes, there are many things to watch, but when you layer this one with the other bullish signals we’ve noted so far in 2023, we continue to hold an overweight to equites in our Carson House Views.

 

Nasdaq Outperforms The DJIA By a Bull Market
Thu, May 18, 2023

Every day it seems the gap just keeps getting wider, and today the YTD performance spread between the Nasdaq and the DJIA widened out to over 20 percentage points - or the equivalent of the traditional threshold for a bull market. As of Thursday afternoon, the Nasdaq was up 20.4% YTD while the DJIA was barely hanging above the unchanged line with a gain of 0.3%. Since the Nasdaq launched in early 1972, there have only been three other years where the index outperformed the DJIA by more than 15 percentage points YTD through 5/18, but 2023 is on pace to go down as the only year where the performance gap exceeded 20 percentage points.



The question going forward is, will the Nasdaq continue its outperformance for the remainder of the year, or will the DJIA step up and play catch up? There have only been three other years where the Nasdaq even outperformed by 15 percentage points at this point in the year, but below we have provided a snapshot of both indices during those three years. For each set of charts, we show the performance of each index in the top charts where the gray shading shows the period from the start of the year through 5/18. Underneath each of those charts, we also show the relative strength of the Nasdaq versus the DJIA where a rising line indicates outperformance on the part of the Nasdaq and vice versa.

Of the three years shown, the Nasdaq continued to outperform the DJIA by a wide margin for the remainder of the year in two of them (1991 and 2020). In 1983, on the other hand, the Nasdaq actually declined 8.2% for the remainder of the year giving up all of its prior outperformance as the DJIA rallied 4.6%.