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U.S. stocks finished lower Wednesday, with the S&P 500 closing out May with a small gain, as investors weighed remarks from Federal Reserve officials on monetary policy while awaiting a debt-ceiling vote by Congress.
The Dow Jones Industrial Average DJIA closed 0.4% lower on Wednesday, while the S&P 500 SPX fell 0.6% and the Nasdaq Composite COMP shed 0.6%, according to preliminary data from FactSet.
In…
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If there were no tax cheats in America, there would be no Social Security crisis. Benefits could be paid, and payroll taxes kept the same, for the next 75 years.
That’s not me talking. That’s math. It comes from the number crunchers at the Social Security Administration and the Internal Revenue Service.
And it explains why those of us who support Social Security should be pounding the table in outrage over one clause of the Biden-McCarthy debt ceiling deal: The part where the president has to retreat from his crackdown on tax cheats just so McCarthy and the House Republicans would agree to prevent America defaulting on its debts.
It’s just two years since the administration got into law an extra $80 billion for the IRS to beef up enforcement. That was supposed to include hiring an estimated 87,000 IRS agents.
OK, so nobody likes paying taxes and nobody likes the IRS. Cue the inevitable critiques of an IRS tax “army,” and so on. But this isn’t about whether taxes should be higher or lower. It’s about whether everyone should pay the taxes that they owe.
After all, if we’re going to cut taxes, shouldn’t they apply to those of us who obey the laws as well as those who don’t? Or do we just support the “Tax Cuts for Criminals” Act?
Why would any voter rally around a platform of “I stand with tax cheats?”
The Congressional Budget Office calculated that the extra funding for the IRS would have reduced the deficit, because it would more than pay for itself. But it’s now been cut by an estimated $21 billion out of $80 billion.
If this seems abstract, consider the context and how it affects you and your retirement — and the retirements of everyone you know.
Social Security is now running at an $80 billion annual deficit. That’s the amount benefits are expected to exceed payroll taxes this year. (So say the Social Security Administration’s trustees.)
Next year, that deficit is expected to top $150 billion. By 2026, we’re looking at $200 billion and rising. The trust fund will run out of cash by 2034, and without extra payroll taxes will have to slash benefits by a fifth or more.
Over the next 75 years, says the Congressional Budget Office, the entire funding gap for the program will average about 1.7% of gross domestic product per year.
Meanwhile, how much are tax cheats stealing from the rest of us? A multiple of that.
According to the most recent estimates from the IRS, tax cheats steal about $470 billion a year. And that figure is four years out of date, relating to 2019. That’s the figure after enforcement measures.
Oh, and the Treasury Inspector General for Tax Administration says that’s a lowball number.
But it still worked out at around 12% of all the taxes people were supposed to pay (including payroll taxes). And around 2.3% of GDP.
Over the next 10 years, based on similar ratios to GDP, that would come to another $3.3 billion.
Sure, Social Security’s trust fund is theoretically separate from the rest of Uncle Sam’s finances. But that’s an accounting issue: A distinction without a difference.
Social Security is America’s retirement plan. Few could retire in dignity without it. Yet it is facing a fiscal crisis. By 2034, without changes, the program will be forced to cut benefits — drastically.
Some people want to cut benefits. Others want to raise the retirement age, which also means cutting benefits. Others want to raise taxes on benefits — which also means cutting benefits. Others want to hike payroll taxes, either on all of us or (initially) only on very high earners.
At last — just 40 or so years out of date — some are starting to talk about investing some of the trust fund like nearly every other pension plan in the world, in high-returning stocks instead of just low-returning Treasury bonds.
(It is hard for me to believe that it’s now almost 16 years since I first wrote about this ridiculously obvious fix And, yes, I’ve been boring readers on the subject ever since, including here and most recently here, and, no, I have no plans to stop.)
But if investing some of the trust fund in stocks is a no-brainer, so, too, is insisting everyone obey the law and pay the taxes they actually owe each year. I mean, shouldn’t we do that before we think about raising taxes even further on those who abide by the law?
How could anyone object? Any party that believes in law and order would support enforcing, er, law and order on tax evasion. And any party of fiscal conservatism would support measures, like tax enforcement, to narrow the deficit.
And, actually, any party that truly supported lower taxes for all would be tough on tax evasion: It is precisely this $500 billion in evasion by a small, scofflaw minority that forces the rest of us to pay more. We have, quite literally, a tax on obeying the law.
One of the many arguments in favor of taxing assets or wealth, instead of just income, is that enforcement would be easier and evasion much harder.
Washington, D.C., seems to be a place where people come up with complex proposals just so they can avoid the simple, fair ones.
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By Mauro Orru
Nestle appointed Anna Manz from the London Stock Exchange Group to succeed Francois-Xavier Roger as chief financial officer after he decided to step down in pursuit of new professional challenges.
The Swiss packaged-foods giant said Tuesday that Manz would take over as soon as she is released from her present duties as chief financial officer and board member at the London Stock Exchange Group. Roger will remain in place until then, Nestle said.
“Anna has spent her career growing businesses and improving operational efficiencies,” said Chief Executive Mark Schneider. “Her deep knowledge of the consumer goods industry, combined with her extensive experience across many corporate functions, make her uniquely positioned to help lead Nestle into its next phase of value creation.”
Write to Mauro Orru at mauro.orru@wsj.com; @MauroOrru94
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Icahn Enterprises LP’s stock
IEP,
fell another 3% Friday to extend its month-to-date losses to 61%. The stock has been under pressure since a May 2 report by short-selling firm Hindenburg Research that accused Icahn’s publicly traded investment vehicl eof inflating asset values and causing his company to trade at a large premium. The report from May 2 has cost IEP more than $10.9 billion in lost market cap. The stock took another downturn on Thursday, after Bill Ackman, founder and chief executive of Pershing Square Capital Management, weighed in on the Hindenburg report with some thoughts of his own, that revived a longstanding fued between the two billionaires. Ackman taunted his rival by reiterating Icahn’s oft-quoted Wall Street saying that if you need a friend, get a dog. “Over his storied career, Icahn has made many enemies. I don’t know that he has any real friends. He could use one here,” Ackman wrote in a lengthy tweet. IEP shares are down 38.5% this week alone.
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Japanese stocks are primed to outpace global peers this year, with the Nikkei 225 Stock Average reaching its highest level in nearly 33 years last week and up 17.6% year-to-date.
However, most of the Japan’s stock outperformance is a direct result of renewed weakness in Japanese yen, and it could tell us little about domestic policy or economic performance in Japan, argued Adam Cole, chief currency strategist at RBC Capital Markets.
Unsurprisingly, Japan’s outperformance is attracting attention. Investors have cited a number of drivers besides a weak yen, including corporate governance reforms, a push to return cash to shareholders, and cheaper valuations and lower volatility relative to much of the U.S. market.
Billionaire investor Warren Buffett is also feeding the excitement. Berkshire Hathaway Inc.
BRK.A,
BRK.B,
has boosted its stake in five Japanese trading conglomerates and now has more equity exposure in Japan than any other country outside the U.S.
The Nikkei
NIK,
the best performing major market index of 2023, has solidly outperformed the S&P 500
SPX,
which is up around 7% so far this year. The iShares MSCI Japan ETF
EWJ,
which tracks the MSCI Japan Index, is up 9.7% in the year to date, versus a gain of 7.5% for the S&P 500-tracking SPDR S&P 500 ETF Trust
SPY,
See: Japan’s stock market is smoking the S&P 500. Is it too late to jump in?
Cole, in a note, pointed to the chart below highlighting the relative performance of Japanese equities, which has recently followed the dollar/yen currency pair
USDJPY,
closely. It “should not be surprising given the prominence of exporters in listed Japanese companies,” he said in a Wednesday note.
The U.S. dollar fetched 139.45 yen Wednesday, its strongest level versus the Japanese currency since last November, amid broad strength for the greenback. The ICE U.S. Dollar index
DXY,
which measures the currency’s strength against a basket of six major rivals, advanced 0.4% to 103.90 on Wednesday, according to FactSet data.
Cole thinks there is strong evidence that economic activity in advanced economies has become less sensitive to exchange-rate movements over the last 30 years as moves in foreign exchange tend to be “fully passed through to trade prices and hence export margins.”
As a result, internationally-exposed equity markets have become more sensitive to exchange-rate movements.
When comparing the Nikkei 225’s performance relative to the MSCI World Index
990100,
which represents large and midcap equity performance across all 23 developed markets, Cole said Japanese equities are almost “exactly in the middle of the last 30 years’ range, rather than being at a 30 year high.”
If RBC’s expectation of further yen weakness is correct, Japanese stocks may still have the potential to continue their outperformance, said Cole.
He warned, however, that investors should be aware that the causality should run from the currency to the equity market, instead of the other way. That means the rally in the equity market tells us “little about domestic policy or economic performance in Japan,” Cole said.
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U.S. stocks closed mostly higher Thursday, as technology companies fueled gains amid investor enthusiasm surrounding artificial intelligence. The S&P 500
SPX,
finished 0.9% higher, while the tech-heavy Nasdaq Composite
COMP,
climbed 1.7% and the Dow Jones Industrial Average
DJIA,
slipped 0.1%, according to preliminary data from FactSet. Chip maker Nvidia Corp.
NVDA,
was the top-performing stock in the S&P 500, surging as the index’s tech sector closed with sharp gains of more than 4%, preliminary FactSet data show. Communication services was the second strongest sector in the S&P 500 on Thursday, rising a modest 0.4%. Nvidia shares have skyrocketed as investors anticipate the company will benefit from generative AI.
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Illumina Inc.
ILMN,
shareholders voted Thursday to elect one of activist investor Carl Icahn’s nominees to its board, and voted against the re-election of company Chairman John Thompson, according to media reports on Thursday. The genomics company has been engaged in a proxy battle with Icahn since March, who was seeking to unseat its chairman and chief executive and add three of his own candidates to the board. Illumina had blasted back that Icahn’s board nominees were “unqualified,” urging shareholders to reject all three and instead support its “highly qualified” nominees. Icahn had said that Chief Executive Francis de Souza and other “protectors” seem “dead set on destroying the company.” Illumina had defended its own track record. “Illumina is the only pure-play genomics company with profitable revenue growth,” it said in an early May statement. Icahn started the proxy fight with Illumina in March, criticizing the company’s plan to buy cancer-screening company Grail Inc. But Icahn himself is in a weakened position, under fire from a recent report from short seller Hindenburg Research accusing the firm of inflating asset values and causing his company to trade at a large premium. The report has cost IEP $10.9 billion in lost market cap since it was published on May 2. Last week, the storied investor admitted he was wrong to take a huge short position that led to losses of $9 billion. And earlier this month, IEP disclosed a federal probe into its corporate governance and other issues. It’s not clear if that was related to the Hindenburg report.
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“‘Icahn’s favorite Wall Street saying: “If you want a friend, get a dog.” Over his storied career, Icahn has made many enemies. I don’t know that he has any real friends. He could use one here.’”
That was billionaire hedge-fund manager Bill Ackman, founder and chief executive of Pershing Square Capital Management, resurrecting his longstanding feud with billionaire activist investor Carl Icahn in a tweet Wednesday.
Ackman was referencing the fallout from the recent report by short-selling firm Hindenburg Research that accused Icahn’s publicly traded investment vehicle, Icahn Enterprise Partners LP
IEP,
of inflating asset values and causing his company to trade at a large premium. The report from May 2 has cost IEP about $10.9 billion in lost market cap, after the stock tumbled another 21% on Thursday.
Ackman said he is neither long or short IEP but merely “watching from a distance.”
But he seemed to agree with Hindenburg’s founder and CEO, Nate Anderson, who questioned margin loans extended to Icahn using his roughly 85% stake in IEP as collateral. Icahn has not disclosed the terms of those loans although he recently told the Financial Times that he used the money to make additional investments outside of his publicly traded vehicle.
“Over the years I have made a great deal of money with money,” he was quoted as having said. “I like to have a war chest, and doing that gave me more of a war chest.”
Ackman said the margin lender or lenders “must be extremely concerned with the situation,” particularly after IEP has disclosed a federal investigation of its business and corporate governance.
For his part, Icahn has called Hindenburg’s analysis “misleading and self-serving” and said it was designed solely to hurt long-term IEP shareholders.
Ackman compared the situation to that of failed investment fund Archegos, “where the swap counterparties were comforted by each having relatively smaller exposures to the situation.”
“The problem is that multiple lenders make for a more chaotic situation. All it takes is for one lender to break ranks and liquidate shares or attempt to hedge, before the house comes falling down. Here, the patsy is the last lender to liquidate.”
Ackman also expressed his surprise that Icahn has not disclosed the margin-loan terms, or even said who provided them. “My understanding of 13D SEC rules is that they require disclosure of sources of financing and even copies of financing agreements, although many investors ignore these requirements.”
Ackman also questioned how IEP’s large dividend yield is feasible, as it’s not supported by operating cash flows.
“The yield is generated by returning capital to outside shareholders, which is in turn funded by the company selling stock to investors,” said Ackman.
Icahn’s problem now is that his system has been outed by the short seller, Ackman wrote.
“Transparency is not the friend of $IEP having caused a more than 50% decline in the shares, which has caused Icahn to post more shares, now more than 65% of his holdings,” he said in the tweet.
The bad blood between Icahn and Ackman goes back to a business dispute the two had over a 2003 deal involving Hallwood Realty. The litigation between them went on for years.
But their animosity for one another hit a crescendo in 2013, when Bill Ackman publicly waged a $1 billion short-selling campaign against Herbalife. Sensing weakness, Icahn took a long position in Herbalife’s stock
HLF,
and helped deal Ackman significant losses on his bet over time.
The two claimed they had made up in 2014, sharing a stage at a conference broadcast by CNBC.
Ackman had previously had taken a soft shot at Icahn over the Hindenburg report, saying there was a “karmic quality” to it. But now their battle of Wall Street titans appears to be back in full force.
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U.S. stock futures were mixed Thursday as Nvidia results boosted tech but debt ceiling concerns weighed on the Dow.
On Wednesday, the Dow Jones Industrial Average
DJIA,
fell 256 points, or 0.77%, to 32800, the S&P 500
SPX,
declined 30 points, or 0.73%, to 4115, and the Nasdaq Composite
COMP,
dropped 76 points, or 0.61%, to 12484.
Recurring fiscal concerns are battling with a nascent technological paradigm for the market’s lead. Fears about the looming debt-ceiling deadline is counteracted by ebullience over AI to deliver a stark bifurcation.
Futures for the Dow Jones Industrial Average — a gauge arguably currently more sensitive to broader economic conditions — were under pressure early Thursday, while futures for the tech-rich Nasdaq 100 — powered by optimism over a secular AI shift — surged strongly.
“The prospect of the U.S. government being unable to meet its financial obligations continues to be a key influence on investor sentiment in global equity markets,” said Derren Nathan, head of equity research at Hargreaves Lansdown.
Ructions at the short end of the Treasury market — where some 1-month bill yields
TMUBMUSD01Y,
broke above 7% — illustrate trader anxiety that unless Congress can reach an agreement to extend the debt-ceiling the U.S. government may technically default at the beginning of June.
Ratings agency Fitch late Wednesday said it was placing Washington’s AAA credit rating on watch for a possible downgrade given what it termed the debt ceiling “brinkmanship”.
However, results and comments from chipmaker Nvidia
NVDA,
whose stock is soaring 25% in premarket action, have boosted hopes that AI will deliver the next period of strong growth for a number of tech companies.
“The AI revolution may be making a lot of noise but results from microchip firm Nvidia hint at some substance behind the hype,” said Russ Mould, investment director at AJ Bell.
CS.ai Inc.
AI,
and Advanced Micro Devices
AMD,
were among those bathing in Nvidia’s AI glow early Thursday.
The optimism over semiconductors bade well for the wider tech sector, according to Mark Newton, head of technical strategy at Fundstrat: “Semis in relative terms to broader technology, have the potential to break back out to new all-time highs this week on a ratio basis. That would be important and positive for this leading sector to show such strength.”
U.S. economic updates set for release on Thursday include the weekly initial jobless claims data and the second reading of first quarter GDP, both at 8:30 a.m. Eastern. Pending home sales for April will be published at 10 a.m..
Fed officials making comments include Richmond Fed President Tom Barkin speaking at 9:50 a.m. and Boston Fed President Susan Collins talking at 10:30 a.m.
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Nvidia Corp. headed toward market-capitalization gains of nearly $200 billion in after-hours trading Wednesday, which could put the chip maker within sight of becoming only the seventh U.S. company to top a valuation of $1 trillion.
Nvidia shares
NVDA,
jumped 25% in the extended session Wednesday, after executives predicted that revenue would exceed the company’s record by more than 30% in the current quarter. The audacious forecast arrived as tech companies look to jump on advances in artificial intelligence that are largely powered by Nvidia’s computing gear.
Nvidia ended Wednesday’s session with a market cap — the total value of all shares in existence — of roughly $754.3 billion, according to FactSet. A 25% increase would add nearly $189 billion to that total, putting the company within striking distance of $1 trillion. Only six U.S. companies have ever attained a $1 trillion market cap: Apple Inc.
AAPL,
and Microsoft Corp.
MSFT,
are currently worth more than $2 trillion apiece; Google parent Alphabet Inc.
GOOGL,
and Amazon.com Inc.
AMZN,
have valuation of more than $1 trillion; and Facebook parent Meta Platforms Inc.
META,
and Tesla Inc.
TSLA,
have both touched the $1 trillion plateau previously.
Nvidia’s market cap was ahead of both Meta and Tesla as of Wednesday’s close, with both worth less than $650 billion, showing the potential fleeting nature of such a valuation. Nvidia’s record market cap is $834.4 billion, established on Nov. 29. 2021, according to Dow Jones Market Data.
If Nvidia’s gains hold through Thursday’s trading session, the company could challenge for the largest one-day market-cap gain in history. The biggest currently on record was Amazon’s $191.2 billion increase on Feb. 4, 2022, according to Dow Jones Market Data, followed closely by a $190.9 billion gain by Apple on Nov. 10, 2022. Nvidia also stands to gain more than rival Advanced Micro Devices Inc.
AMD,
is worth in total — AMD ended Wednesday’s session with a market cap of $174.4 billion.
Nvidia is closing in on the rare $1 trillion plateau because of huge gains in its stock this year, as hopes and hype about generative AI have flooded the tech sector. After OpenAI debuted its ChatGPT AI offering, and investor Microsoft quickly integrated the chatbot into many of its services, expectations for the technology have exploded.
Despite the hype, most companies have avoided providing hard figures for revenue gains expected from AI. Nvidia’s fiscal second-quarter forecast — which calls for roughly $11 billion in sales, nearly 33% higher than Nvidia’s previous quarterly record of $8.28 billion — could be seen as the first sign of a wave of fresh spending coursing through the tech sector.
Other companies have indicated that they will be forced to spend to develop their technology before reaping large financial rewards from it. Microsoft, for example, disclosed to investors last month that capital expenditures are increasing as it builds AI capabilities into its Azure cloud-computing platform — spending that is largely going toward Nvidia.
Full earnings coverage: Nvidia stock soars toward all-time high as AI push leads executives to predict record revenue
That is a rather typical path for large jumps in tech spending: Companies that make the necessary hardware see gains before the companies that use that gear can develop offerings that take advantage of it. Other gear makers joined Nvidia in the sharp move higher in after-hours trading Wednesday, including AMD, which gained more than 10%; chip maker Marvell Technology Inc.
MRVL,
which increased more than 5%; and networking specialist Arista Networks Inc.
ANET,
which added about 5%.
Alphabet and Microsoft stocks both increased around 2% in after-hours trading, and software companies that have made AI a core part of their offerings also saw gains. Palantir Technologies Inc.
PLTR,
and C3.ai Inc.
AI,
shares both increased more than 8%, for example.
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If the U.S. government cannot pay all its bills because of a debt-ceiling impasse, household borrowing costs could soar, the job market could shed millions of jobs and stock-market valuations could shrink, according to forecasts.
The consequences of a prolonged default could be grim, according to Moody’s Analytics. The projected fallout from a brief default is less severe but still enough to push an “already fragile” economy into a mild recession, Moody’s says.
On Wednesday, Treasury Secretary Janet Yellen said it’s “almost certain” that the Treasury will run out of resources in early June. She also said she would provide a new update on the debt-limit deadline “pretty soon.”
For all the uncertainties, financial experts say there are ways individuals can prepare. Start by making sure your deposits are in accounts backed by the Federal Deposit Insurance Corp., and think hard about rate-sensitive purchases like a car or a house.
It’s important for people to have a plan in case there is a default, said Rob Williams, managing director of financial planning, retirement income and wealth management at the Schwab Center for Financial Research, a division of Charles Schwab Corp.
SCHW,
“On Wednesday, Treasury Secretary Janet Yellen said it’s ‘almost certain’ that the Treasury will run out of resources in early June.”
“Having a financial plan in place that looks at the long and short term is the best way to prepare for the debt ceiling or any other crisis,” he said.
There is still widespread expectation that Congress will strike a political deal that lifts the federal government’s $31 trillion borrowing limit. President Joe Biden and House Speaker Kevin McCarthy met again on Monday, and more talks are planned.
McCarthy on Wednesday said he “firmly believe[d]” the sides would reach a deal avoiding default.
But the window of time in which to act is getting smaller. It’s “highly likely” that the government will get to the point where it cannot pay all its bills and debt obligations in early June — possibly as early as June 1, Yellen said this week.
Meanwhile, new Federal Reserve figures offer a reminder that Americans’ personal finances over the last year have been under pressure, even as inflation rates retreat slowly.
More than one-third of people in the U.S. (35%) said they were worse off in 2022 than in 2021, according to the Fed’s annual look at economic well-being, released Monday.
That’s the largest percentage of people saying they were worse off since central bank researchers started asking the question nearly a decade ago.
“If there ever was a time for a rainy-day fund, this is it. But it’s not going to be able to help a lot of consumers,” said Rachel Gittleman, financial services outreach manager for the Consumer Federation of America.
For example, Social Security payments and payments to veterans could be delayed in the event of a default, she said. “There will be a lot of consumers who will be in an impossible financial situation,” Gittleman said.
Getty Images/iStockphoto
The FDIC guarantees deposits up to $250,000 on accounts including checking, savings and certificates of deposit. That won’t change in the case of any default, an FDIC spokesperson told MarketWatch.
Deposit-insurance coverage came into hard focus in early spring when Silicon Valley Bank and Signature Bank failed, putting other regional banks under pressure as many customers moved their money into bigger banks.
If economic conditions deteriorate after a default, Gittleman said, people will want assurance their money is safe. If you haven’t taken any of the recent bank failures as a sign to put money in an FDIC-insured account, “this would be the time,” she said.
During the early days of the pandemic when there were millions of job losses, many people had to quickly cut back on or delay regular expenses.
If a default puts people in an economic vise, Gittleman said they may need to be ready to shut down nonessential recurring payments and talk with their lenders and credit-card companies. “It’s thinking holistically about all of your financial expectations and where you can possibly either get forbearance or some leniency and ask for some help,” she said.
Credit-card debt reached $986 billion in the first quarter, according to the Federal Reserve Bank of New York, and delinquencies on credit cards and car loans continued to move higher after pandemic lows.
After more than a year of rising interest rates, it’s already a tough time to finance a major purchase. On Tuesday, the 30-year fixed mortgage rate climbed higher than 7% for the third time this year.
Any default lasting at least a month would push the 30-year mortgage up to 8.4% in September and price out hundreds of thousands of buyers, according to Zillow
Z,
But that is no reason to speed up a home purchase, said Daniel Milan, founder and managing partner of Cornerstone Financial Services.
“Any default lasting at least a month would push the 30-year mortgage up to 8.4% in September and price out hundreds of thousands of buyers, according to Zillow.”
The Federal Reserve doesn’t set mortgage rates, but its policies influence their direction. The big questions are when the central bank will stop increasing its benchmark rate and when it will begin to reduce the rate.
“The odds of a rate cut outweigh the fear or the rush into buying a home now because of the debt-ceiling crisis,” Milan said.
But the Schwab Center’s Williams noted that trying to time a major financial decision around market and political events is a difficult task.
Financial decisions are a mix of math and emotions, even though many people tend to focus more on the math, he said. That’s why it’s important to figure out a financial plan. Often the best course is to stick to your plan and say, “I’m not going to make major changes in the face of market news,” Williams said.
The Dow Jones Industrial Average
DJIA,
the S&P 500
SPX,
and the Nasdaq Composite
COMP,
closed sharply lower in volatile trading on Tuesday and opened lower and have stayed lower in Wednesday trading.
Tuesday marked the Dow’s third straight trading-day loss. By Wednesday afternoon, the index had shed more than 200 points.
The yields on short-term Treasury debt
TMUBMUSD01M,
maturing in early June are pushing toward 6% amid continued uncertainty about whether a debt-ceiling resolution can come together fast enough to avoid a government default. Bond prices and yields move in opposite directions, reflecting less investor appetite for debt.
There’s no one rule for preparing an investment portfolio for a debt default, financial advisers said. But older retired investors are in a trickier spot — especially in relation to the prospect of delayed Social Security checks — compared with younger investors who have more time to bounce back from adverse events.
“‘We continue to urge clients to make sure we know about any short-term cash needs so that those funds are not at risk.’”
Cash investments have proven attractive in rocky times. But the risk of a debt default could make a heftier cash allocation even more important for older investors, financial advisers said.
“We continue to urge clients to make sure we know about any short-term cash needs so that those funds are not at risk,” said Lisa A.K. Kirchenbauer, founder and president of Omega Wealth Management.
Kirchenbauer said she’s starting to hear from clients about debt-ceiling concerns. “I am making sure that larger [required minimum distributions] are in cash for 2023 now, before anything bad happens in the markets.”
Required minimum distributions are the minimum yearly amounts that have to be pulled out of qualified retirement accounts once the owner reaches a certain age, currently 73.
Preparing for any default is a mental exercise as much as asset allocation, said Amy Hubble, principal investment adviser with Radix Financial. If there’s been no change in a person’s personal circumstances, like job status, income needs or retirement timeline, they should avoid getting sidetracked by short-term issues, she said.
“There are only a small handful of things we can actually control when investing,” Hubble added. “So my advice is always to focus on that: keeping costs low, staying diversified, managing tax-recognition timing and avoiding stupid emotion-driven actions.”
Read also: BlackRock’s Rick Rieder sees ‘epic’ cash on sidelines as he takes lead role on new ETF
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U.S. stocks ended lower in volatile trade on Tuesday as investor jitters grew over limited progress in U.S. debt-ceiling negotiations as default deadline approaches. The Dow Jones Industrial Average
DJIA,
dropped 231 points, or 0.7%, to finish at 33,055. The S&P 500
SPX,
was off 1.1%, posting its biggest daily decline since May 2, according to FactSet data. The Nasdaq Composite
COMP,
tumbled 1.3%. Representatives of President Joe Biden and congressional Republicans continued the debt-ceiling talks on Tuesday with no signs of progress as the deadline to raise the U.S. government’s $31.4 trillion borrowing limit is approaching. White House press secretary Karine Jean-Pierre on Tuesday said the 14th Amendment is not going to resolve Washington’s debt-ceiling standoff. Meanwhile, House Speaker Kevin McCarthy reportedly told Republicans that the negotiations still have some distance to go. Uncertainty around the standoff pushed yields on Treasury bills maturing between early and mid-June toward 6% on Tuesday. The yield on the six-month Treasury bill
TMUBMUSD06M,
also went up to as high as 5.41%, its highest level since 2000.
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Continued uncertainty about whether a debt-ceiling resolution can come together fast enough to avoid a government default pushed yields on Treasury bills maturing between early and mid-June toward 6% on Tuesday.
The yield on Treasury bills maturing on June 6 touched that level before slipping slightly to 5.997% Tuesday afternoon, according to Bloomberg data. Meanwhile, the rate on T-bills maturing on June 8 was at 5.905%.
In addition, the one-year T-bill issued in June 2022 and which matures on June 15 was yielding 6.141%, though analysts said that was likely being impacted by a government auction on Tuesday. That 6.141% yield was the highest of any government obligation maturing within two weeks after the so-called X-date of June 1 — when Treasury Secretary Janet Yellen said the government might be unable to pay all its bills if no action is taken on the debt ceiling.
The Treasury bill market is where debt-ceiling angst has played out the most and Tuesday brought wild trading as investors questioned whether the government will be forced to miss payments after June 1. At the moment, the T-bill market is in a state of dislocation — one in which yields ranged from as little as 2.924% on the government obligation maturing on May 30 to as high as 6.141% on the 1-year bill maturing in three weeks.
The higher the yield on a Treasury obligation, the more investors are demanding to be compensated for the risk of holding that bill. Yields also rise when investors are selling off or staying away from the underlying maturity. Tuesday’s moves suggest that investors and traders are factoring in at least some risk that the government could cross the X-date without a debt-ceiling resolution.
Right now, the market regards bills maturing between June 6 and June 15 as “the most at risk for a delayed payment and no one wants to own” them, said Lawrence Gillum, the Charlotte, N.C.-based chief fixed income strategist at LPL Financial.
“Ultimately, markets expect something to get done, but money managers who have to own those T-bills are not taking any chances,” he said via phone.
For much of Tuesday, the broader financial market appeared to be relatively confident that a debt-ceiling agreement could be reached by June 1, a day after President Joe Biden and House Speaker Kevin McCarthy each described talks as “productive” on Monday. Then came word of McCarthy telling House Republicans on Tuesday that negotiators were nowhere near a deal yet, with Bloomberg citing Republican Representative Ralph Norman and another unidentified person in the room.
All three major U.S. stock indexes
DJIA,
COMP,
finished lower, while Treasury yields beyond the 2-year rate slipped toward the end of Tuesday’s New York trading session — a sign of fading optimism in the outlook for the U.S. economy.
Read: ‘Survival of the strongest’: How pandemic-era shifts may upend market’s recession narrative
One of the financial market’s favorite indicators of impending U.S. recessions — the difference between the 2- and 10-year Treasury yields — has been persistently inverted since July 5, 2022. That’s the longest such streak since May 1980, and yet no recession has been declared so far by the only arbiters who matter, those at the National Bureau of Economic Research.
On Tuesday, fed funds futures traders priced in a 28.1% chance of another quarter-point rate hike by the central bank in June, which would take the main policy rate target to between 5.25%-5.5%. They also factored in a slight 5.6% likelihood of another similar-size rate hike in July.
Gillum and Greg Faranello, head of U.S. rates at AmeriVet Securities in New York, said they see a small chance of no debt-ceiling agreement by June 1. Under such a scenario, the Treasury market would fall into “disarray,” with T-bill yields spiking in a manner reminiscent of last year’s crisis of confidence in the U.K. bond market, they said. It would also make it harder for the Fed to hike rates on June 14, and likely lead to a flight-to-quality trade in longer-term Treasurys as equities sell off.
See: ‘Doomsday machine’: Here’s what could happen if the debt ceiling is breached
As of Tuesday, the T-bill market was “definitely showing some signs of stress, there’s no question about it,” Faranello said via phone. Meanwhile, “the economy is doing better than the narrative of recession,” even after the recent turmoil in regional banks, and a move toward 4% in the 10-year rate this year “can’t be ruled out.” However, that could change quickly based on the outcome of the debt-ceiling debate.
Getting something done on the debt ceiling by June 1 “is going to be a challenge,” Faranello said. The risk of default “is small but not a zero-percent probability,” as is the prospect of chaos if negotiators come too close to the wire and create a period of confusion in the Treasury market.
“At a minimum, there would be pretty severe economic damage” from a default or any confusion, it “could be chaotic,” and “you would see that impact on risk assets,” he said.
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U.S. stocks closed mixed Monday as investors monitored the debt-ceiling showdown in Washington. The S&P 500
SPX,
finished about flat, while the technology-heavy Nasdaq Composite
COMP,
advanced 0.5% and the Dow Jones Industrial Average
DJIA,
fell 0.4%, according to preliminary data from FactSet. President Joe Biden and House Speaker Kevin McCarthy were scheduled to meet at 5:30 p.m. Eastern Time on Monday to negotiate raising the U.S. debt ceiling. Treasury Secretary Janet Yellen has warned that the U.S. could run out of cash to pay all of its bills as soon as June 1 if Congress doesn’t lift the country’s borrowing limit.
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As President Joe Biden and House Speaker Kevin McCarthy prepare to meet Monday afternoon over the debt-ceiling standoff, it’s really getting to be crunch time.
“We need to see a deal by Friday to have confidence that it can clear both
chambers before the June 1 deadline,” Height Capital Markets analysts said in a note.
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St. Louis Fed President James Bullard on Monday said he would like to see two more quarter-percentage-point interest-rate hikes this year.
“I think we’re going to have to grind higher with the policy rate in order to put downward pressure on inflation,” Bullard said in a moderated discussion at the American Gas Association’s Financial Forum in Fort Lauderdale, Fla.
Bullard said that the timing of the rate hikes was uncertain but that he has been an advocate of raising rates “sooner rather than later.”
“You want to get the downward pressure while you can,” he said.
The Fed raised its benchmark rate by 25 basis points to a range of 5%-5.25% at its meeting in May. That matches the median forecast of Fed officials for the peak interest rate in this cycle.
Officials at the Fed are divided over whether to continue to hike rates at their meeting in mid-June or pausing to see how the economy is affected by lags from the rapid pace of hikes. Some officials don’t like the word “pause” and have described holding rates steady in June as a “skip,” because it underlines that they are not saying they are done raising rates.
The markets think the Fed is done with rate hikes and have even been pricing in rate cuts later this year.
Bullard said that the Fed’s forecast of no more hikes was based on its expectations of slower growth and a faster drop in inflation in the first half of the year than has been seen in subsequent data.
“Inflation is hanging up too high,” Bullard said.
Stocks
DJIA,
SPX,
were set to open slightly higher on Monday, while the yield on the 10-year Treasury note
TMUBMUSD10Y,
rose to 3.7%.
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Greek stocks surged on Monday after an unexpectedly easy victory for the ruling conservative party.
The Greek Athex Composite
GD,
jumped 7%, following the landslide victory of the conservative party led by Prime Minister Kyriakos Mitsotakis. The U.S.-listed Global X MSCI Greece ETF
GREK,
rose 6% in premarket action.
Mitsotakis’s New Democracy was leading the left-leaning Syriza party by more than 20 percentage points. Even so, it doesn’t look like it will have an outright majority, though the winning party under Greek rules gets bonus seats in a second round, which is likely to be held in either late June or early July.
From the archives (June 2012): Polarized Greece heads to the polls amid financial crisis
The victory was unexpectedly large following a railway disaster and a wiretap scandal.
The yield on the 10-year Greek government bond
TMBMKGR-10Y,
fell 20 basis points to 3.81%.
Greece is on the verge of obtaining an investment-grade rating and achieved a positive primary balance — that is, a budget minus interest costs — last year.
Thanks to the financial assistance it’s received, the weighted average maturity of Greek debt was 17.5 years, according to Greece’s public-debt management agency, making it less susceptible to the rise in European Central Bank interest rates than other countries.
According to Goldman Sachs, the Greek debt-to-GDP ratio will fall by almost 10 percentage points in the next three years.
Market Extra (April 2015): Charts show current version of Greek crisis nothing like 2012, so far
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President Joe Biden on Sunday called for Republicans to agree to compromises in debt-ceiling negotiations, as he wrapped up a visit to Japan for a G-7 summit and prepared to fly back to Washington, D.C.
“Now it’s time for the other side to move from their extreme positions, because much of what they’ve already proposed is simply, quite frankly, unacceptable,” Biden said during a news conference in Japan.
“It’s time for Republicans to accept that there is no bipartisan deal to be made solely — solely — on their partisan terms. They have to move, as well,” he said.
Biden’s comments on movement were similar to what House Speaker Kevin McCarthy said two days ago. The House Republican from south-central California told reporters on Friday that there needs to be “movement by the White House, and we don’t have any movement yet, so, yeah, we’ve got to pause.”
Rep. Garret Graves, a Louisiana Republican deputized by McCarthy to lead the talks, had earlier Friday characterized Republicans as pressing a pause button after prior reports that a deal framework was coming into view,
The president’s remarks in Hiroshima came as investors are watching for fresh signs of a bipartisan deal that would lift the federal government’s borrowing limit and prevent a market-shaking default.
Biden accused some Republicans of risking the economic damage of a default because of the 2024 White House race.
“I think there are some MAGA Republicans in the House who know the damage that it would do to the economy, and because I am president and presidents are responsible for everything, Biden would take the blame, and that’s the one way to make sure Biden is not re-elected,” he said.
During Sunday’s news conference, Biden, who cut short his trip because of the looming debt-ceiling crisis (leading to the cancellation of a Quad summit in Australia), said he and McCarthy will be talking later Sunday while he is flying back to the U.S.
“My guess is he’s going to want to deal directly with me,” the president said, adding that it had to do with “making sure we’re on the same page.”
“Our teams are going to continue working,” Biden also said.
When asked about McCarthy’s call for government spending to be less next year than this year, Biden said his side is “willing to cut spending, as well as raise revenue,” referring to tax increases. He also said his team is waiting for a GOP response to the White House’s latest counterproposal.
Graves, the Louisiana Republican, had, with his Friday-morning characterization of debt-ceiling negotiations as at a “pause,” suggested the Biden White House’s representatives were being “unreasonable.” Talks resumed Friday evening, but negotiators quickly called it quits for the night, and there was little progress reported Saturday, with McCarthy telling reporters that he didn’t think there would be an ability to “move forward until the president can get back.”
Treasury Secretary Janet Yellen warned on May 1 and again last week that a U.S. default could happen as soon as June 1 if Congress doesn’t raise the debt ceiling. The Bipartisan Policy Center and Congressional Budget Office have each offered similar projections.
Biden had for months called for a so-called clean increase of the $31.4 trillion cap on federal debt issuance, arguing that the time to address the levels of future government spending is instead during the annual budget-writing process.
In August 2011, lawmakers approved an increase to the debt limit just hours before a potential government default. Within days, the U.S. lost its triple-A credit rating from S&P for the first time in history, with the ratings agency saying the American political system had become less stable. U.S. stocks
SPX,
DJIA,
plunged in August 2011 following that debt downgrade by S&P.
Now read:
Debt-ceiling standoff: Here’s what could go into a bipartisan deal
Biden expresses confidence on achieving debt-ceiling deal: ‘America will not default’
‘Doomsday machine’: Here’s what could happen if the debt ceiling is breached
Ukraine’s Zelensky takes part in G-7 summit n Hiroshima as world leaders sanction Russia
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President Joe Biden on Sunday called for Republicans to agree to compromises in debt-ceiling negotiations, as he wrapped up a visit to Japan for a G-7 summit and prepared to fly back to Washington, D.C.
“Now it’s time for the other side to move from their extreme positions, because much of what they’ve already proposed is simply, quite frankly, unacceptable,” Biden said during a news conference in Japan.
“It’s time for Republicans to accept that there is no bipartisan deal to be made solely — solely — on their partisan terms. They have to move, as well,” he said.
Biden’s comments on movement were similar to what House Speaker Kevin McCarthy said two days ago. The House Republican from south-central California told reporters on Friday that there needs to be “movement by the White House, and we don’t have any movement yet, so, yeah, we’ve got to pause.”
Rep. Garret Graves, a Louisiana Republican deputized by McCarthy to lead the talks, had earlier Friday characterized Republicans as pressing a pause button after prior reports that a deal framework was coming into view,
The president’s remarks in Hiroshima came as investors are watching for fresh signs of a bipartisan deal that would lift the federal government’s borrowing limit and prevent a market-shaking default.
Biden accused some Republicans of risking the economic damage of a default because of the 2024 White House race.
“I think there are some MAGA Republicans in the House who know the damage that it would do to the economy, and because I am president and presidents are responsible for everything, Biden would take the blame, and that’s the one way to make sure Biden is not re-elected,” he said.
During Sunday’s news conference, Biden, who cut short his trip because of the looming debt-ceiling crisis (leading to the cancellation of a Quad summit in Australia), said he and McCarthy will be talking later Sunday while he is flying back to the U.S.
“My guess is he’s going to want to deal directly with me,” the president said, adding that it had to do with “making sure we’re on the same page.”
“Our teams are going to continue working,” Biden also said.
When asked about McCarthy’s call for government spending to be less next year than this year, Biden said his side is “willing to cut spending, as well as raise revenue,” referring to tax increases. He also said his team is waiting for a GOP response to the White House’s latest counterproposal.
Graves, the Louisiana Republican, had, with his Friday-morning characterization of debt-ceiling negotiations as at a “pause,” suggested the Biden White House’s representatives were being “unreasonable.” Talks resumed Friday evening, but negotiators quickly called it quits for the night, and there was little progress reported Saturday, with McCarthy telling reporters that he didn’t think there would be an ability to “move forward until the president can get back.”
Treasury Secretary Janet Yellen warned on May 1 and again last week that a U.S. default could happen as soon as June 1 if Congress doesn’t raise the debt ceiling. The Bipartisan Policy Center and Congressional Budget Office have each offered similar projections.
Biden had for months called for a so-called clean increase of the $31.4 trillion cap on federal debt issuance, arguing that the time to address the levels of future government spending is instead during the annual budget-writing process.
In August 2011, lawmakers approved an increase to the debt limit just hours before a potential government default. Within days, the U.S. lost its triple-A credit rating from S&P for the first time in history, with the ratings agency saying the American political system had become less stable. U.S. stocks
SPX,
DJIA,
plunged in August 2011 following that debt downgrade by S&P.
Now read:
Debt-ceiling standoff: Here’s what could go into a bipartisan deal
Biden expresses confidence on achieving debt-ceiling deal: ‘America will not default’
‘Doomsday machine’: Here’s what could happen if the debt ceiling is breached
Ukraine’s Zelensky takes part in G-7 summit n Hiroshima as world leaders sanction Russia
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