The Debt Bomb - Your Money May 19th, 2023

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A ticking time bomb grows ever so close with a looming June 1st deadline for U.S. politicians to strike a deal on fiscal spending. If the bomb goes off and the debt ceiling is breached, the U.S. will be risking a downgrade of its' bonds which would be devastating for the economy and, likely, catastrophic for the equity markets. The Democrats continue to argue for more spending while Republicans want to reign-in out of control government expenses. Today's talks stalled after a relatively congenial agreement during the week had the two sides taking the possibility of a debt default off the table and working towards a negotiated settlement. Well, we have seen this movie before through many administrations and it usually ends with an 11th-hour marathon negotiating session into the wee hours, ultimately avoiding an economic meltdown. No side wants to budge right now but they also want to avoid being the party that caused the failure. Stay tuned!

Moving on, corporate earnings continue to pour in. This week, the consumer was under the microscope. Names like Walmart, Target, Home Depot, Foot Locker, and Canada Goose all reported and gave us some insight into the health of North American retail companies. Consumers have been shifting their spending lower and to cheaper alternatives. Walmart is the beneficiary of this, raising its' annual sales and profit targets as shoppers sought cheaper groceries from the retail giant. Not so good for Target as they missed the mark with lower profits and guided on a weaker sales forecast. In Canada, the luxury apparel provider Canada Goose flew high above analyst estimates on Q1 earnings but investors punished the stock, pushing it lower by 20% on fears of a recession hitting the high end of the consumer spectrum. Foot Locker had its' worst day ever, down 27% on poor sales and a not-so-good forecast, bringing the week's retail sector to a close with a whimper. Remember that the consumer makes up nearly 70% of the U.S. GDP.

We are perplexed by the state of commodity prices this week. Being cyclical in nature, oil, gas, and copper prices appear to be reflecting the nervousness of a potential recession that is lurking. That, folks, means lower demand - but it’s the supply side of the equation that continues to have us focused on being somewhat overweight in material and energy stocks; especially with China coming back from the COVID lockdowns as the second largest economy in the world. This week's lower commodity prices pressured the TSX down by a half point to 20,651.

Globally, Japanese stocks continue their year-to-date strength, rising 4.5% this week and outperforming the S&P 500 for the year and the week as the primary U.S. stock index was up 1.49% alongside the Dow which saw a meager gain of 0.35% this week. The NASDAQ trumped both of its' cohorts with a 3% gain this week after a 10% move in Semiconductor stocks like AMD, NVIDIA, and Micron.

Federal Reserve Chair Jerome Powell said on Friday it is still unclear if U.S. interest rates will need to rise further, as central bank officials balance uncertainty about the impact of past hikes in borrowing costs and recent bank credit tightening with the fact that inflation is proving hard to control. This served to spark more pessimism about the direction of the economy and, in conjunction with the debt ceiling debacle, added pain to the equity markets before the close. This explains why the market sold off ahead of the long weekend. Looking into next week we will focus-in on new home sales, personal spending, and consumption numbers as well as earnings reports from Canadian Banks.

Finally, there is just over a week to go to help the Ocean Wealth team at PI Financial get to the summit of Mount Logan through the Power to Summit challenge! This event raises funds for young kids and adults with mental and physical barriers in life.  Go to to learn more and donate to a cause we are proud to support every year.
Happy trading and Stay Safe.

Ian David Clark

Portfolio Manager CIM, CFP