Debt Ceiling Bomb Defused…What Now?

“Cut the green wire!” Beads of sweat on the brow; close-up of nervous eyes; suspenseful music in the background; tentative snip with a wire cutter. Bomb stops ticking; sighs of relief.

That sort of scene is a cinematic cliche, but that’s figuratively what transpired this past Memorial Day holiday, as President Joe Biden and House Speaker Kevin McCarthy (R-CA) announced a last-minute deal to raise the debt ceiling and avert blowing up the economy and stock market.

The deal struck over the three-day weekend would suspend the $31.4 trillion debt ceiling until January 1, 2025, allowing the U.S. government to pay its bills.

Experts had warned that a debt default could cause the stock market to plunge as much as 45%, a debacle on the magnitude of the historic crashes in 1929, 1987, and 2008.

Ultra-conservatives in the House are balking because most of their budget cutting proposals were discarded in the compromise, but it’s likely that the bill will make it through Congress and onto Biden’s desk.

That said, stocks drifted lower Tuesday, in the wake of the Conference Board’s report that its Consumer Confidence Index fell in May to 102.3, down from an upwardly revised 103.7 in April. The main U.S. stock market indices closed mixed in choppy trading, as follows:

  • DJIA: -0.15%
  • S&P 500: +0.00%
  • NASDAQ: +0.32%
  • Russell 2000: -0.32%

The Dow has closed lower in six of the last seven sessions. Also dampening investor sentiment toward the end of Tuesday’s trading session were reports that members of the ultra-right House Freedom Caucus intend to challenge McCarthy’s speakership because they’re enraged by the debt ceiling compromise.

To win the speakership job in January, McCarthy agreed to demands from the caucus for a procedural change whereby a single vote, either by a Republican or Democrat, could trigger a “motion to vacate,” which would in turn force a vote on removing the speaker. Once that happened, it would only take a simple majority in the House to remove McCarthy.

The party’s right flank on Tuesday vowed to set this removal process in motion. The McCarthy Death Watch has begun. Uncertainty in Washington will continue to roil markets into the foreseeable future.

The Fed takes center stage again…

Wall Street’s gaze has now turned to the next meeting of the Federal Reserve’s policy-making Federal Open Market Committee (FOMC), scheduled for June 13-14. Odds are growing that the Fed will “pause” its tightening, as the economy sufficiently stalls to cool inflation.

The expectation that the Fed will ease up has driven a rally in technology stocks, as the following table shows:

Growth stocks, especially in the tech sector, are vulnerable to rising rates because they diminish the value of future earnings. Hence the tech rally, as the Fed starts to make faintly dovish noises.

The Great Divergence…

Problem is, we’re seeing a divergence between mega-cap outperformers and the broader market. The NASDAQ is up more than 24% year to date, but the New York Stock Exchange Advance/Decline (NYAD) line has been falling. “Bad breadth” often presages a stock market plunge. To make a convincing bull case, I’d need to see a broadening of stock market leadership and a rising NYAD line.

It’s a bullish trend, though, that the S&P 500 remains well above its 50- and 200-day moving averages.

Also driving tech stocks higher have been better-than-expected first quarter earnings results, as well as the general euphoria over the prospects of artificial intelligence (AI).

WATCH THIS VIDEO: The Rise of Artificial Intelligence, Algorithms, and “Robo-Trading” on Wall Street

Whether in factory automation, customer service, or medical research, AI is increasingly a part of mainstream society. AI’s uses are expanding exponentially. The “halo effect” of AI is benefiting tech stocks as a whole.

AI is certainly no fad. The size of the global AI market was valued at USD 136.55 billion in 2022 and it’s projected to expand at a compound annual growth rate of 37.3% from 2023 to 2030, according to Grand View Research.

However, many analysts are raising the alarm that AI could also prove a Frankenstein monster that turns on its creator. History has shown that ultra-fast algorithmic trading acts as an accelerant in market movements, up or down. The crash of 1987, for example, was fueled in large part by computerized trading.

But as Warren Buffett said: “What we learn from history is that people don’t learn from history.”

That’s why my colleague Dr. Stephen Leeb has produced a special report on how to survive the tectonic shifts facing the financial world.

Dr. Leeb is chief investment strategist of The Complete Investor. Amid the upheavals he sees ahead, he says the most profitable investment opportunity won’t be found among conventional assets. His research indicates it will be a tiny under-the-radar play, as revealed in this report.

John Persinos is the editorial director of Investing Daily.

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