How Hyper-Partisanship Affects Your Portfolio
The U.S. debt ceiling fight reminds me of the title of a 1991 investing book that greatly influenced me: Being Right or Making Money, by Ned Davis.
As for me, I’d rather make money. But in this political climate, making money is getting tougher.
Some of the investment analysts I converse with on a regular basis are reflexively dismissive of all politics. They argue that the fundamental and technical indicators override political posturing.
And it’s true, the machinations in Washington often amount to Kabuki theater that can be ignored. But not always. As Democrats and Republicans continue to wrangle over the debt ceiling, we’re learning that hyper-partisanship has its tangible consequences.
Even if a U.S. debt ceiling resolution is reached, just the fact that negotiations have descended into trench warfare is undermining the economy and financial markets.
The partisans in the debt ceiling drama are convinced of their respective righteousness. President Biden blames MAGA extremists; U.S. House Leader Kevin McCarthy (R-CA) blames White House intransigence.
The ratings agencies don’t care who’s to blame. Fitch, one of the top three credit rating agencies along with Moody’s and S&P, on Wednesday placed the country’s “AAA” rating on “watch negative.”
Fitch asserted in a statement: “The Rating Watch Negative reflects increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit despite the fast-approaching x date (when the U.S. Treasury exhausts its cash position and capacity for extraordinary measures without incurring new debt).”
The repercussions of a first-ever default on the federal debt would immediately cascade around the world. No corner of the globe would be spared.
According to a new report from Moody’s, U.S. economic growth would plunge, 7.8 million American jobs would evaporate, borrowing rates would soar, the unemployment rate would spike from the current 3.4% to 8%, and a stock market crash would obliterate $10 trillion in household wealth.
Concerns about the debt ceiling talks already are driving short-term yields higher. During the previous debt ceiling fight in 2011, an agreement was reached at the 11th hour, but the S&P 500 plunged about 16% anyway, due to Wall Street’s anxieties over the brinkmanship.
The following table depicts the likely economic damage this time around, as assessed by the White House’s Council of Economic Advisers (CEA):
The main U.S. stock market indices closed mixed Thursday, in choppy trading, as follows:
- DJIA: -0.11%
- S&P 500: +0.88%
- NASDAQ: +1.71%
- Russell 2000: -0.70%
The star performer of the day was chipmaker Nvidia (NSDQ: NVDA), shares of which soared nearly 25% in the wake of blockbuster first-quarter earnings results that crushed estimates on the top and bottom lines.
The company is reaping the benefits of the artificial intelligence (AI) revolution, and its spike on Thursday also drove the tech-heavy NASDAQ higher.
Also impressive was Nvidia’s guidance. The company expects second-quarter revenue to come in at about $11 billion, whereas Wall Street was expecting $7.2 billion. Nvidia’s outperformance triggered a rush for AI stocks.
But other than the sizzling hot tech sector, the broader stock market has been dampened by the debt ceiling mess. Indeed, we’re seeing deteriorating market breadth, which is a bad sign, as a handful of mega-cap tech stocks drive the market.
International stocks also have been in a funk this week, as the political woes in America rattle world markets. Crude oil prices have been sinking, amid fears of recession-induced energy demand destruction.
U.S. benchmark West Texas Intermediate fell more than 3% on Thursday, to hover at about $71 per barrel. OPEC+ production cuts have not succeeded in driving oil prices higher.
Voters tend to live in their own media ecosystems that skew reality to their preconceived biases. For example, polls show that a majority of voters who watch Fox News blame the Democrats for the debt ceiling deadlock; most of those who watch MSNBC blame the Republicans. In other words, both political parties stand to lose.
And yet, the two sides are far apart. The finger-pointing and recriminations are escalating, not waning. So yes, sometimes political partisanship matters to your portfolio…very much so.
I recently heard some members of Congress actually say that they’re not sweating the debt crisis because “regular Americans” don’t care about the government shutting down, a viewpoint that’s staggeringly ignorant, as well as nihilistic. Anyone who gets a monthly Social Security check will care when it doesn’t show up.
This is a perilous moment. Until the debt ceiling fight is resolved, stay defensive. Consider increasing your exposure to gold, the traditional safe haven during crises.
Also avoid the stocks of companies that are heavily reliant on federal government revenue, such as construction companies involved in public works, health care providers dependent on Medicare and Medicaid, and Pentagon contractors. If Uncle Sam defaults, these folks aren’t getting paid.
The good news is, if the White House and GOP leaders actually cobble together a deal before the “x date” of June 1, investors will find themselves on a glide path for growth.
The Federal Reserve on Wednesday released minutes from its May 2-3 policy meeting of the Federal Open Market Committee (FOMC), revealing that FOMC officials are less confident on the need for more interest rate hikes.
If we get a “pause” in tightening at the FOMC’s next meeting in June, the move could serve as a catalyst for the stock market’s next leg up.
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.