Queue the western music. Janet Yellen has recently said that the U.S. may be unable to pay its bills unless there is a debt ceiling increase by June 1st. On one side of the stand-off, Republicans do not want to increase the debt ceiling without spending cuts. For the Democrats, they believe the debt ceiling should be raised without restrictions, as was done multiple times under Trump, and spending cuts should be debated within the government spending bill.
In my opinion, they both are right. The debt now is ridiculous. In 1990, the United States had a little over three trillion dollars in public debt. Today, that number is over thirty trillion, with over ten trillion of that coming under the combined Trump and Biden administrations. Don’t let anyone fool you, both Republicans and Democrats have spending problems. There are really only three solutions; spend less, take in more taxes, or some combination of those. The Republicans have it right that there should be spending cuts.
The US defaulting on its debts shouldn’t even be in the realm of possibilities, though. The US treasury has to increase the debt ceiling each year to pay for previous spending commitments. In other words, it’s paying for what both Republicans and Democrats have agreed to in the past. It has nothing to do with future spending. I believe that over the next few weeks, there will be all sorts of grandstanding and posturing, but ultimately think the ceiling will get lifted, even if it’s just a short-term fix.
Let's get into the data:
- 12-month CPI was 4.9% in April. The Bureau of Labor Statistics reported a monthly increase of 0.4%, largely in line with expectations.
- Retail sales increased 0.4% in April, missing expectations. While April’s number was below expectations, it is still a solid number and was the first increase since January. Some retailers, though, have reported slower spending, such as Home Depot, suggesting the pandemic-fueled home renovation surge is slowing.
- Corporate profits have been strong: As of Friday, over 90% of the S&P 500 market cap has reported earnings, with 69% of them beating analyst expectations. We always expect the beat rate to be high because of how companies give guidance, but even in that context companies are reporting well.
What Does the Data Add Up To?
Inflation is falling, down significantly from the peak of 9.1% in June of 2022, but still too high. At the same time, the labor market still remains hot, with April unemployment down to 3.4%, matching January’s 53-year low. There are signs though that the labor market may start to cool down as well. The JOLTS survey, which shows job openings, showed the lowest number since May of 2021. Anecdotally we hear about certain sectors experiencing hiring freezes and layoffs, such as in tech and banking.
While recent attention has shifted to the debt ceiling, it is my belief a deal gets done and we go back to the norm of watching the Fed. The Fed still has a big job to do in getting the economy back to a reasonable inflation and a sustainable unemployment rate. On May 3rd Jerome Powell announced another rate hike, bringing the Fed funds rate to 5.25%. While they did raise rates, The Fed seemed to soften its language on future actions, suggesting that we may be at the point where the Fed pauses its raises. That said, Chairman Powell left open the possibility of future hikes, saying they will be data-dependent.
The next meeting, on June 13th and 14th, will be interesting to say the least. With inflation clearly on a downward trend and the US still flirting with a recession, we think the Fed should be pausing.
Markets through May 16th, 2023
- The S&P 500 is up 7.71% YTD
- MSCI EAFE (International) Index is up 11.03% YTD
- Barclays Aggregate Bond is up 2.81% YTD
The Smart Investor
Unless you were among those who filed for an extension, tax season is over. 77% of tax filers get a refund in Florida, with the average refund size being $4,337. What to do with your refund? It’s a good moment to think through ways to tune up your finances and position yourself to lower your tax bill next year.
What can you do? Some ideas:
- Pay down high-interest debt
- Add your refund to your emergency fund. If your income or your debts have increased, you need a bigger cushion
- Put it in a 529 plan for education savings. These accounts can be used for K-12 education costs as well as college
- Increase retirement savings
- Donate to charity. Being strategic about how you give can mean you have a bigger impact, and an even bigger tax savings.
Even if you decide to use the additional funds for something more immediately gratifying, thinking through the options with your long-term plan in mind is a good exercise and may help you make other changes.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities that represent the stock market in general. The Bloomberg Barclays US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate-term investment-grade bonds traded in the United States and is used for measuring the performance of the US bond market. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East.
This material is provided as a courtesy and for educational purposes only. Investing involves risk including loss of principal. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. This article contains links to articles or other information that may be contained on a third-party website. River City Wealth Management is not responsible for and does not control, adopt, or endorse any content contained on any third-party website. The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. Past performance is not indicative of future results.