Last Week’s Markets in Review: Debt Ceiling Can’t Hold Down Markets

Global equity markets finished higher for the week. In the U.S., the S&P 500 Index closed the week at a level of 4,192, representing a gain of 1.71%, while the Russell Midcap Index moved 0.90% higher last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 1.93% over the week. As developed, international equity performance and emerging markets were positive, returning 0.37% and 0.52%, respectively. Finally, the 10-year U.S. Treasury yield moved higher, closing the week at 3.67%.

For weeks the market has been overwhelmingly concerned with the U.S. debt ceiling, and rightfully so. A failure to raise the ceiling promptly would result in the U.S. Treasury being unable to meet its obligations on time and default on its debt. Such an event has never occurred in the history of the Nation. Yet, the likely consequences of such a catastrophe would be expected to crush global investor confidence and financial markets despite being unable to quantify the results of a potential default fully.

In the past, the U.S. government has had episodes of shutdowns that have not significantly impacted the economy, and the 2011 debt ceiling crisis would represent the closest such event to today’s circumstances. The crisis arose as lawmakers debated whether to increase the limit on government borrowing to meet financial obligations. The prolonged negotiations and disagreements between political parties led to heightened market volatility, with concerns over a potential default on U.S. debt. Ultimately, a last-minute agreement was reached, but the crisis significantly impacted investor confidence and contributed to economic uncertainty during the recovery from the global financial crisis.

Today we sit in a similar seat to 2011. According to the U.S. Treasury, the ceiling has already been reached. However, the Fed can “buy itself time” by temporarily using cash available on its balance sheet and by exploring extraordinary measures such as halting investments into federal retirement accounts. However, these measures are temporary, and the two sides of our government must find common ground to avoid the most feared. The rally over the past week in the markets was due to confidence in the two political parties’ ability to reach an agreement. Comments by lawmakers on both sides of the aisle suggested that we would ultimately end up with a situation that we have experienced 78 times already since 1960 and avoid default.

While the market waits for a political resolution, Federal Reserve Chair Powell spoke on Friday on the “Perspectives on Monetary Policy” panel to round off the week. Despite the early-day sell-off, markets recovered much of their losses as the Chairman suggested during his speech that interest rates may not have to rise as much as expected to help reduce inflation.

Investors should consider all the information discussed within this market update and many other factors when managing their investment portfolios. However, with so much data and so little time to digest, we encourage investors to work with experienced financial professionals to help process all this information to build and manage the asset allocations within their portfolios consistent with their objectives, timeframe, and tolerance for risk.

Best wishes for the week ahead!

Equity Market, Fixed Income returns, and rates are from Bloomberg as of 5/19/23. Economic Calendar Data from Econoday as of 5/19/23. International developed markets are measured by the MSCI EAFE Index, emerging markets are measured by the MSCI EM Index, and U.S. Large Caps are defined by the S&P 500 Index. Sector performance is measured using the GICS methodology.

Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.