Debt Ceiling Time Bomb Unnerves Investors

Tick…tick…tick. We are one week away from the “X-Date” (June 1), when the U.S. Treasury might exhaust the extraordinary measures it has been deploying since January to pay the nation’s bills.

Some political observers argue that government officials have a few accounting tricks up their sleeves and could possibly delay the deadline into August. However, the uncertainty alone is having consequences, by generating market volatility, stoking fear and hesitation, and exacerbating the expectations of a recession.

One of the ways that U.S. debt obligations can be met without a deal is through the use of the 14th Amendment, particularly section four which states: “the validity of the public debt of the United States…shall not be questioned.”

The debt ceiling debate isn’t the proper opportunity to argue over the meaning of the Constitution. However, this may end up taking place, because Republicans and Democrats remain far apart.

It’s almost impossible to predict the effect a missed U.S. coupon payment would have on global financial markets. But it’s probably safe to say that almost all assets would rapidly lose value as investors’ faith in the global financial system falters.

Because I can’t predict the shape of the potential deal, it’s difficult to recommend any specific purchases that will help one hedge against a possible default. Of course, gold is a classic hedge and may give you some shelter in the event of a missed coupon payment.

Read This Story: Two More Reasons to Invest in Gold

Given the polarized atmosphere in Washington, the most likely outcome is a compromise that will provide politicians with breathing room, open the door for further negotiations, and leave the debt ceiling as a key political issue for the 2024 general election.

Earnings: negative, but improving…

For first-quarter 2023, the blended earnings decline for the S&P 500 is -2.2%, according to research firm FactSet. “Blended” combines actual numbers that companies have reported with estimates. If -2.2% is the actual decline for the quarter, it will mark the second straight quarter that the index has reported a decline in earnings.

Two consecutive quarters of earnings declines is widely considered to constitute an “earnings recession.” However, the earnings picture has steadily improved, thanks to big beats from certain bellwethers, led by the information technology, consumer discretionary, and health care sectors. On March 31, the estimated earnings decline for Q1 was even worse, at -6.7%.

For Q1, with 95% of S&P 500 companies reporting actual results, 78% of S&P 500
companies have reported a positive earnings surprise and 76% have reported a positive revenue surprise.

Five of the 11 S&P 500 sectors are reporting or have reported year-over-year earnings growth, led by consumer discretionary and industrials. Six sectors have reported a year-over-year decline in earnings, led by materials and utilities.

Looking ahead, the second quarter isn’t shaping up to be a big improvement. For Q2, 58 S&P 500 companies have issued negative earnings guidance and 41 have issued positive guidance.

Recession fear grips the corporate C-suite…

Are corporate managers this earnings season particularly worried about a recession? Yup.

FactSet analysts searched for the term “recession” in the conference call transcripts of all the S&P 500 companies that conducted earnings conference calls from March 15 through May 18.

Among these companies, 107 cited the term “recession” during their earnings call for the first quarter. This number far exceeds the five-year average of 77 and the 10-year average of 59 (see chart).

Not surprisingly, the financial services sector sports the highest number of S&P 500 companies citing “recession” on Q1 earnings calls. The recent spate of regional banking failures has spooked bank managers everywhere.

U.S. stocks fell on Tuesday, as debt ceiling negotiations broke down again. Debt ceiling anxieties continued to weigh on stocks Wednesday, with the major U.S. stock market indices closing lower as follows:

  • DJIA: -0.77%
  • S&P 500: -0.73%
  • NASDAQ: -0.61%
  • Russell 2000: -1.16%

The CBOE Volatility Index (VIX), the so-called “fear gauge,” jumped more than 8% to surpass 20, a worrisome threshold that portends increased volatility.

In positive news, the Federal Reserve on Wednesday released minutes from its May 2-3 policy meeting, revealing that Fed officials are starting to warm to the idea of a “pause” in rate hikes.

However, until President Biden and GOP leaders cobble together some sort of agreement, the stock market will remain a roller coaster.

In the meantime, we could be facing a tectonic upheaval in the financial world that shakes out the winners from the losers. My colleague Dr. Stephen Leeb has pinpointed a way to not only survive this upheaval, but also thrive from it.

Dr. Leeb is chief investment strategist of The Complete Investor. His research has unearthed an obscure investment that’s poised to reap outsized gains from the paradigm shift he sees ahead. Click here for details.

John Persinos is the editorial director of Investing Daily.

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