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May 10, 2023 – Stocks have stayed within a narrow range awaiting today’s CPI report. Yesterday’s White House meeting to find a solution to the debt ceiling crisis was an expected dud. All sides seem to expect an 11th hour solution but no one has found the solution yet. Congress normally reacts to pending crises at the proverbial 11th hour. Investors still favor that outcome this time around, but the black swan risk of failure grows larger as the deadline approaches.

//  by Tower Bridge Advisors

Stocks finished lower yesterday as investors awaited the meeting at the White House between the President and leaders of Congress and this morning’s CPI report. Unfortunately, the meeting, which took place after the market closed, produced no headway. We are now within three weeks of a debt default although we have seen this movie before. If you are old enough to remember the Saturday morning serials at the movie theater, the hero, who appears to be falling over the cliff, somehow is rescued by the next episode. So far, markets buy that outcome, but as the deadline gets closer, investors will agitate if some progress isn’t forthcoming.

One can understand the logic from both sides. The debt ceiling relates to yesterday’s bills. On the other hand, if your kid uses up his credit limit on his credit card, is your response simply to raise the limit? That’s the quandary politicians face but it is the outcome that investors have to deal with. For markets, it’s still too early to panic, but if we get to the final few days without any headway, history shows that markets could have a hissy fit.

Away from the debt ceiling discussion, there is little else moving markets. There are a few stragglers reporting earnings and, for them, the results make a difference. Retailers will start reporting within the week, but for most others, earnings season is over. As for the economy, data is rather consistent. It is still growing but the growth rate is slowing. As for inflation, it’s slowing as well but the pace of decline still keeps the Fed concerned. The next Fed meeting remains weeks away, and there is still a lot of data between now and then. The strong consensus is that the Fed will pause in June but it also remains data dependent. If inflation is still too high along with rapid job growth, another increase in Fed Funds rates can’t be ruled out. CPI numbers to come this morning could be market moving, but there will be other data to come before the next FOMC meeting. Thus, today’s number will have to be read in context with data yet to come. It could move markets today but one-off CPI numbers only matter if they are part of a meaningful pattern.

I often talk about a vacuum period between earnings seasons. We are entering that moment. But this time, the debt ceiling debate interferes. Assuming, however it happens, that we again avoid default and the debt ceiling is raised somehow, the real question will shift to whether we have a recession, and, if so, how severe.

Since this would be a recession of the Fed’s creation, the real question is the Fed’s response. If one listens to the Fed, the answer is not until next year at the earliest. If you listen to the market and Fed Fund futures, the answer is late summer and again before year end. Markets ultimately have to resolve this dilemma.

All economic evidence suggests some sort of recession is coming. Unemployment claims have edged up noticeably in recent months. That has never happened post-WWII without an ensuing recession. Leading economic indicators lead to the same conclusion. Thus, it is logical to expect some sort of real slowdown in the second half of 2023. The question becomes, has the market already discounted this? At 18x forward P/Es, the answer should be not completely. Bull markets rarely begin before recessions begin. Right now, there is tension between investors trying to find the economic bottom and those who see valuations high for the start of a new bull market. That battle will take time to play out.

The net is that, in the short run, all hangs on the outcome of the debt crisis negotiations. We have never crossed that barrier, but politics has never been this bifurcated. There’s always a first time. With that said, if we do reach the debt ceiling without a resolution, everyone in office will be blamed. Whether the White House chooses to default or pay less to Social Security recipients, or whether soldiers go unpaid, every elected official will not only share short-term blame, but the fact that they let us default will haunt reelection campaigns. There will be no winners.

If everyone is an apparent loser, default shouldn’t happen. Hopefully, it won’t. So far investors are willing to make that bet. As the deadline approaches, reactions will change and fears are likely to rise. Yesterday gave us no reason not to expect at least an eleventh hour solution leaving the possibility of default open.

Today is a day for one-name singers. Bono turns 63. Donovan is 77.

James M. Meyer, CFA 610-260-2220

Additional information is available upon request.

# – This security is owned by the author of this report or accounts under his management at Tower Bridge Advisors.

Additional information on companies in this report is available on request. This report is not a complete analysis of every material fact representing company, industry or security mentioned herein. This firm or its officers, stockholders, employees and clients, in the normal course of business, may have or acquire a position including options, if any, in the securities mentioned. This communication shall not be deemed to constitute an offer, or solicitation on our part with respect to the sale or purchase of any securities. The information above has been obtained from sources believed reliable, but is not necessarily complete and is not guaranteed. This report is prepared for general information only. It does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed in this report and should understand that statements regarding future prospects may not be realized. Opinions are subject to change without notice.

Filed Under: Market Commentary

Previous Post: « May 8, 2023 – Stocks rallied on Friday as regional bank stocks rebounded. Was it simply short-covering or was Thursday a washout moment for this battered group? Today’s action will say a lot. Apart from the regional banks, the focus will be on this week’s White House meetings regarding the pending debt ceiling crisis. The outcome, good or bad in tone, may be market moving.
Next Post: May 12, 2023 – While mega caps keep gaining steam, the average stock is now down for the year. Eight of the last nine trading sessions have been negative for the Dow Jones Industrial Average. The Fed may be done raising rates, but an all-clear signal is far off in the distance. Transitions are hard! »

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  • June 7, 2023 – Stocks continue to march higher in defiance of market pundits’ forecasts for a looming economic downturn which most expect to begin this fall. Perhaps too many investors are defensively positioned, thereby making the path of least resistance higher for the time being.
  • June 5, 2023 – Last Friday’s unemployment market action surprised investors when the two employment surveys indicated opposite results. The more reliable of the two surveys, showed strong payroll employment, which could have sent the market worrying about the Fed’s reaction to the hot report. Instead, we saw a sharp rally and we suspect that there will be significantly more “soft landing” prognostications this week.
  • June 2, 2023 – Stocks traded higher yesterday following the passage of the Fiscal Responsibility Bill in the House as well as some dovish comments by a Fed Governor. Last night, the debt Bill was passed in a bi-partisan vote in the Senate. Now the Bill will go to President Biden to be signed, which will avert a much-feared debt default.
  • May 31, 2023 – Congress now has a week to pass the debt ceiling agreement. While there will be a lot of verbal whining and expressions of righteous indignation, the majority will pass a bill that is likely to have little long-term economic consequence. Once the bill is passed, attention will turn to the mid-June FOMC meeting and the increasing likelihood of yet another interest rate increase.
  • May 26, 2023 – Wednesday’s earnings announcement by Nvidia shocked markets with the speed at which generative AI is being adopted. Even regulators can’t slow it down. Every software developer now has to incorporate AI into everything. The race suddenly got a lot more heated. To win requires the fastest chips and the best software development tools. It is way too early to identify the best products that will evolve but markets yesterday were quick to identify those that have the best building blocks to get to the finish line.
  • May 24, 2023 – The latest version of the “Fast and Furious” movie series is off to a good start. But it doesn’t draw like it used too. We have seen this plot too many times. Sounds like a repeat of the debt ceiling crisis! We don’t know the exact ending but it is unlikely to be a bond default. That doesn’t mean a solution will be without consequences. Interest rates are starting to rise again and may continue after resolution as the Treasury floods the market with new bonds. This isn’t a great short-term backdrop for equities.
  • May 22, 2023 – As go debt ceiling negotiation talks, so goes the financial markets. So far, markets are sanguine, seeing the talks mostly as political theatrics. But that could change this week if no solution is in sight before we all leave for an extended Memorial Day weekend. Whether we leave Friday with a smile or a frown is anyone’s guess at the moment.
  • May 19, 2023 – As the debt ceiling concerns lessen, attention reverts back to earnings. Key retailers aren’t reporting stellar results but their stocks are taking weak guidance in stride, a sign much of the pending bad news is already discounted. That should put a floor underneath the stock market. At the same time, money keeps flowing toward the same technology names. Chasing momentum can be dangerous.
  • May 17, 2023 – Right now, stock and bond prices are slaves to the progress of efforts to extend the debt ceiling. Yesterday afternoon’s White House meeting was more productive than last week’s. Thus, futures are up this morning, but the job is far from done. An inevitable 11th hour moment lies ahead. Hopefully, a solution will emerge, but in this bifurcated Congress, risks of miscalculation are elevated.
  • May 15, 2023 – The debt ceiling approaches but markets don’t seem to care. Perhaps they are right, and a compromise solution is just around the corner. But while June 1 is only a bit over two weeks away, any compromise must pass Congress. That may not be a simple task. If no progress is apparent before Biden leaves for overseas, expect markets to start to show concern.

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