Threats of a U.S. Debt Default and Another Hot Inflation Report: Market Commentary from Cabana’s CEO – May 26, 2023 

11 months ago

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We head into the Memorial Day weekend with no deal on the debt ceiling and another hot inflation report. The Federal Reserve’s favored measure of inflation, the Personal Consumption Expenditures Price Index (PCE), came in above month-over-month and annual estimates. This has resulted in a jump in probability that the Fed will hike rates again at their June meeting. Bond yields have been rising dramatically over the past two weeks and this new data point will add fuel to the fire. It is hard to know how much of the rising bond yields are due to threats of a U.S. debt default or a still overheated economy. In the end it doesn’t much matter because the result is higher rates for longer. This will ultimately pressure the economy into a slowdown as big-ticket items become unattainable for many Americans. Each rate hike also increases the problems faced by banks who are holding huge losses from treasury investments. Finally, we continue to see important swaths of the stock market struggle while technology rockets higher every day. The market cap weighted indices like the S&P 500 (SPY) and the Nasdaq 100 (QQQ) are the beneficiaries. I have included a YTD sector performance chart below which illustrates what I am talking about. 

Source: Stockcharts.com

Maybe the rest of the market will turn the corner and begin to catch up, but until that happens, I am very cautious about the staying power of any breakout rally in the “stock market”.  

I have talked with quite a few family office clients as well as advisor partners this week about the prospects of a debt default and what that could mean. First and foremost, it just can’t happen and the US. keep its place as the financial backbone of the world economy. The impacts of us allowing politics to destroy 250 years of work and leadership cannot be adequately quantified (at least not by me). The U.S. treasury note forms the basis for the risk-free rate against, which all other investments are measured. A failure to pay those obligations could turn a lot of things upside down. Everybody knows this and that is why I do not believe a default will happen. I think we will see some more threats and posturing and maybe even an extension or two, but I think a deal will get done. During the interim, we are likely to continue to see bouncing around in stocks with technology keeping everything else afloat.  

Everyone, have a great holiday and remember those who lost their lives fighting for this country and all the blessings that we enjoy. It is ironic that we will also spend it wondering whether or not we can pay the veterans who remain. 

At Cabana, we remain bearish and allocated accordingly. For those wondering, the stock position that our strategies hold includes technology. 

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January 17, 2024

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