Debt Bomb Diffused - Your Money for June 2nd, 2023

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The latest standoff over the U.S. debt ceiling, resolved just days before the government faced a catastrophic default, has given rise for some to call for the country to abandon its' self-inflicted borrowing ceiling. However, that is unlikely to happen having gained little support in Congress as politics prevails. Though the showdown rattled investors' nerves and threatened a second U.S. debt downgrade within the last decade. Republicans do not want to give up the political leverage they have over keeping the Democrats in check with their free-wheeling spending campaigns, but some budget hawks are saying the self-imposed limits bring the U.S. dangerously close to a debt default and that the country should get back to balanced budgets - spending and cutting when needed.

So, with a successful passage of the debt ceiling bill in the US Senate last night, a first-ever debt default in U.S. history was averted, rocketing the Dow over 700 points today finishing the week up 1% while the S&P 500 gained 1.7% for the week thanks to a boost from names like Digital Realty and Netflix. The chip parade continued to march ahead with Intel leading the charge on a rosy forecast for Q2, bouncing that stock 14% higher, helping to lift the NASDAQ up by 3.2%.

For equity investors, go big or go home has been the mantra, especially when the entire market's returns rely so much on the mega-cap stocks, like Microsoft, Nvidia, Google and Meta.

That's exactly how the S&P 500 has been shaping up year to date, and it does not look good for future returns - either for the trillion-dollar market cap leaders themselves or the broader index. Narrow leadership typically results in slower growth for the broad index. In fact, if you remove the top ten stock leaders, returns typically fall off a cliff in the year after they reach those nosebleed levels. Without their leadership, the S&P 500 is flat for 2023. It remains to be seen whether that plays out now that the Artificial Intelligence (A.I.) craze has everyone talking about this as a game changer that will dominate markets. Perhaps it will be different and A.I. will drive a productivity boom that boosts earnings across the board.

In our country, housing uncertainty is the topic-du-jour as Canada's residential construction activity has begun a significant slowdown since interest rates pushed up higher borrowing costs alongside a tight labor market; a problem that could foil the federal government's ambitions to reduce a housing shortfall and add to the recovery in home prices. Commodity prices remained weak right up until today, which saw oil and material stocks rebound strongly to help limit the damage to TSX finishing the week off a half point to 20,024.

With Q1 earnings pretty much behind us and the U.S. Debt debacle out of the way, we now turn our attention back onto the Federal Reserve, whose hike, skip, and pause on interest rate moves has become high-stakes gambling on the state of the U.S. economy. One day the probability of a boost in rates is north of 70%, the next day it drops to 30%, so not sure if I want to take a bet either way. What is known historically is that the U.S. Central Bank has a habit of overshooting their rate bullets with an urgency to reverse course because they injected too much pain into the broad economy. With ten straight rate increases since the campaign to tackle inflation began, there is pressure on the Fed to pause for the year while leaving the door ajar to a future rise in borrowing costs. Remember that the U.S. is the largest economy in the world and when they sneeze, we catch a cold.

Looking ahead to next week to factory orders and initial jobless claims and who knows what else is in store for us.

Finally, the Ocean Wealth team at PI Financial would like to thank every one of you that helped with donations for the Power to Summit fundraising campaign where our team raised over $15,000 finishing as the top fundraising team out of 80 that climbed. In total, the 80 teams combined to raise a total of $325,000 for Power to Be.
Happy trading and Stay Safe,
Ian David Clark, Portfolio Manager of the Ocean Wealth Team

Information contained herein represents the views of the writer and not those of PI Financial Corp., and based on assumptions which the writer believes to be reasonable. The material contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. This information is intended for distribution in those jurisdictions where PI Financial is registered as an advisor or a dealer in securities. Any distribution or dissemination of this article in any other jurisdiction is strictly prohibited. PI Financial and/or its’ officers, directors, employees and affiliates may, from time to time, acquire, hold or sell a position in the securities mentioned herein

Ian David Clark

Portfolio Manager CIM, CFP