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Volume 12, Edition 14 | May 8 – May 12, 2023

Politic-Proof Your Portfolio

Doug Walters, CFA
With the debt ceiling looming, it is important to remember that politics and portfolios don’t mix.

Contributed by , , ,

The debt ceiling has returned to center stage with only a few weeks left to hammer out a deal. Some estimate government funds could run out as early as June 1. Market measures1 point to the highest probability in recent memory that the US government defaults on its debt obligations. In the end, this is in the hands of Washington.

These discussions do matter. The debt ceiling is a political problem, with both sides far apart. We have seen equity market declines in the wake of previous debt ceiling close calls. Investors understandably are not fans of the prospect of a US default.

So how do you politic-proof your portfolio? Simple. Ignore the politics. We do not know how this is going to play out exactly, but we do know a few things that seem probable:

  • First, this negotiation will likely go to the very last minute and perhaps a little longer. If a deal is to be had, both sides will want to show they fought as long and hard as possible for their concessions.
  • Default is not in the best interest of most politicians. It would be an economic and investing calamity, and Representatives would be chastised by their constituents if they let it happen on their watch.
  • Multiple avenues for resolving this stalemate do not require the blessing of the far right and left within the House of Representatives. They are not smooth or easily traveled roads, but they are there.

Long-term investors cannot worry themselves too much with the whims of Washington. Doing so regularly will undoubtedly result in overtrading and market timing, likely reducing portfolio returns. So the best course of action is to stay the course. Famed investor Peter Lynch once said, “Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.” I would argue this also holds in the realm of politics.

1 One-year Treasury credit default swaps provide a measure of default risk.
5.5%

CPI excluding food and energy

The core Consumer Price Index (excluding food and energy), a key measure of inflation, fell to 5.5%, as expected. Total CPI fell to 4.9% versus the 5.0% expected.

Headline of the Week

How Long?

For months, we have discussed the questions vexing markets; how high will interest rates go? And how long will they stay there? With this week’s reports on inflation (CPI and PPI) and a resurgence of banking issues, we may have the answer to the first question. It looks increasingly likely that the Fed will “pause” rate increases while they assess the impacts of previous increases and deteriorating credit conditions.

This is the second attempt to move the “how long” question to the forefront. The Fed’s data dependency could once again push it back. Also arguable is how much easier it is to pause rates than to answer the “how long” question. The answer to this second question depends more on inflation getting closer to the Fed’s 2% target. While inflation appears to be heading in the right direction, it remains far from the destination. The lagged impacts from rate hikes and banking issues hint at a more extended period for higher rates.

The Week Ahead

The debt ceiling drama will continue to simmer and drive market direction. However, retail sales and earnings reports from some of the biggest store operators may see some interest at home. Preliminary Gross Domestic Product numbers from two of the biggest developed markets and economic releases from China will dominate the international headlines.

Spending Trends

The Retail Sales report in the U.S. is the marquee economic data for the week, and earnings from Walmart Stores (WMT), Target (TGT), Home Depot (HD), TJX Stores (TJX), Ross Stores (ROST) and John Deere Co. (DE) should help identify where consumers are spending their money.

  • Retail Sales are expected to rebound in April from the contraction we witnessed in March to expansion.
  • Estimates are for a 0.7% expansion for April.
  • Home Depot results will have some housing-related nuggets to offer market watchers.
  • Deere will offer a view on how higher rates at tighter lending standards may impact large ticket items.
  • Walmart, Target, and the two off-price retailers will give a peek into the spending habits of the average consumer.

Tea leaves

The first three months of the year from China were encouraging, but most skeptics point to pent-up demand from Covid restrictions as the culprit. Now the focus will be on sustainable economic progress.

  • This week’s retail sales and Industrial production reports should indicate whether there was progress or simply an anomaly.
  • April numbers are expected to be very strong, with industrial production up over 10% and retail sales accelerating by nearly 20% year-over-year.
  • A miss on those numbers will not be a welcomed development for the global economy.

International Relations

Gross Domestic Product for the first quarter from The European Union and Japan and a G7 meeting on Friday are the significant developments.

  • European economies by country have been resilient, and The Union is expected to avoid a contraction.
  • Japan, the third largest economy in the world, barely avoided a recession last quarter and is expected to accomplish that feat again narrowly.
  • There is also a G7 summit that starts Friday in Hiroshima, Japan.
  • It is still unclear if President Biden will be in attendance.

Cold Turkey

President Erdogan has ruled Turkey for over 20 years but faces a possible end to his reign on Sunday.

  • The challenger Kemal Kilicdaroglu is leading in the polls.
  • Political upheaval and a power struggle are likely if Erdogan loses, and a 2nd round of elections may be necessary if a candidate does not achieve 50% of the votes.
  • High inflation, damage from recent earthquakes, and the authoritarian tendencies of Erdogan are vital issues.

I need my Mommy!

We’d like to wish a Happy Mother’s Day to all the ladies in our lives.

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