While the stock market didn’t express outright enthusiasm about the debt ceiling negotiation, it also wasn’t dismayed. The global stock market trended sideways during May, ultimately ending down 1%. Rising interest rates pressured bonds, sending the U.S. bond market down a similar 1.1% on renewed expectations of another interest rate hike by the Federal Reserve. Both headline and core consumer price index data showed inflation remained sticky, with April’s rate running at an annualized 5%. Additionally, while markets previously expected a pause in the Federal Reserve’s hiking campaign, comments by some Fed members created uncertainty. Market participants now expect one more rate hike in mid-June, followed by a pause for two months, then rate cuts once again in November.
The debt ceiling negotiation has set quite the backdrop for markets this month. At the time of this writing, the Senate has passed the debt ceiling deal and it will be sent to President Biden to be signed into law. The measure will suspend the nation’s debt limit through January 1, 2025. Although raising the debt ceiling could be considered a victory of sorts, this political drama hardly inspires confidence in the United States. What should be a routine action to enable the spending already authorized by Congress has become a tool to extract political concessions.
This debt ceiling standoff is not a unique event. We have been here before. Many clients may remember a similar eleventh-hour negotiation over the debt limit back in 2011. While a resolution was reached, the standoff lead one rating agency to downgrade the U.S. federal government’s credit rating. Despite the turmoil, markets eventually marched higher, and investors who sold out missed some significant gains over the subsequent years. Volatility due to the debt ceiling should not supplant the proven power of a long-term investment strategy.
As the end of spring approaches, we hope you enjoy a wonderful start to the summer. To all the graduating students, we extend warm wishes.