Q4 2021 Market Commentary…
What is the U.S. debt ceiling? It’s simply a dollar cap limit that the US Government places on its own authority to raise money by issuing government bonds to continue to meet its obligations like social security payments, tax refunds, interest payments on existing debt, government employee salaries, military salaries, just to name a few. Since 1917, Congress has raised the debt limit 78 times (See Citation 1).
The U.S. government hit the debt limit of $28.4 Trillion (yes, with a T) in July 2 (See Citation 2). In fact, the debt load is a few billion over that as I write this newsletter, and the U.S. Treasury is pushing to get it raised by October 18. Since the U.S. Treasury debt is over the limit, something needs to get done, lest they are forced to default on the payments. Of course, members of congress rarely let that happen. They typical play hard ball with each other and then usually get it done in the 11th hour.
Raising the debt ceiling is not a healthy thing. It’s a necessary evil. With each dollar the government borrows, it steals purchasing power from future generations, and it makes all of us poorer for it. Unfortunately, the alternative is that the government defaults on their obligations. We each know hundreds of people who count on government payments, and no one wants those recipients to be adversely affected by a problem they didn’t create. Beyond the debt, we have other concerns…
• Will the $3.5 Trillion infrastructure bill get passed in Congress?
• Will higher inflation be transitory or here for a longer period?
• How much will the supply chain shock delay or reduce future earnings of companies?
• How will future employment numbers be affected by the corporate vaccine mandates?
As investment advisors, we grapple with questions like these constantly. Our only practicable response is to revert to economic data as it relates to outcomes of these uncertainties. As you know, we have adopted the silo method, by which we view the market through the lens of growth (GDP) and pricing (inflation). We spent most of Q3 in Silo 3 (decelerating GDP + accelerating inflation), and the stock market started to show signs of exhaustion in September as the S&P 500 Index 4.8% (See Citation 3) of its value.
If forthcoming GDP re-accelerates, it might indicate that the recent market swoon was episodic and not a reversal of bullish trend. The combination of accelerating GDP and accelerating inflation would put us back in a reflation condition (Silo 2), and that could be positive for stock prices. However, if GDP continues to decelerate, we could be in for a bumpy ride in Q4. When we get higher prices on goods and services amidst a period of lower economic output, future corporate earnings suffer. If economic recovery becomes less certain, investors get uneasy and market volatility appears. Let’s hope the post-COVID recovery data in October surprises us to the upside.
Citation 1 – https://en.wikipedia.org/wiki/History_of_United_States_debt_ceiling
Citation 2 – CBO.gov/publication/57371
Citation 3 – Yahoo Finance: S&P 500 Index Historical Return data