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Understanding the Debt Ceiling Standoff

Posted by Doug Hutchinson | CFA®, Director of Research and Trading

May 19, 2023

The U.S. government hit its statutory debt limit of $31.4 trillion this January and is now unable to borrow additional money.  The U.S. government is relying on “extraordinary measures” to continue paying all its bills in the meantime, but these accounting maneuvers will only buy so much additional time before the U.S. Treasury runs out of money. 1     
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market perspective stock market performance Economic Indicators Market Volatility

Gaining a Better Perspective on Recent Market Volatility

June 16, 2022
Global equity and bond markets have experienced heightened volatility over the last several months as elevated inflation readings and the prospect of higher interest rates has made the investment landscape appear treacherous. This increased volatility can certainly be unnerving for investors but it is not necessarily unexpected, especially for a mid-term election year. Since 1980, the S&P 500 has an average intra-year decline of 14%.1 But the equity market drawdowns tend to be more severe in midterm election years, particularly in the months prior to Election Day. Research from Federated Hermes Investors found that “Leading up to Election Day, stocks tend to experience a pronounced pullback – 19% on average – before rallying afterward”2 in midterm years. Historically investors have typically been rewarded for staying the course through the temporary pain of volatility during midterm years. Federated Hermes Investors found that “the S&P on average has risen 32% off the midterm election-year bottom. And it has not declined in the 12 months following a midterm election since 1946.”3 Avoiding the Temptation of Market Timing While it may be tempting for investors to try and time the market by selling investments following a market decline and re-enter the market when things feel safer, investors should note that timing the market with such precision is extraordinarily difficult. JPMorgan highlights the pitfalls of a market timing strategy: “First, there is no guaranteed ‘signal’ to get out of the market, and market bottoms are only determined in hindsight. Second, the investor would need to buy in on the worst days during some of the most significant market drawdowns when loss aversion is at its greatest. As a result, it is hard to believe that someone could be smart enough to consistently miss the worst days while courageous enough to invest for the best days.”4 Moreover, some of the days of best performance occur within weeks or even days of the worst days of performance and those good days are extremely important to recovering losses experienced on the worst days. The chart below from JPMorgan shows the cost of missing out on the best days of performance. [+] Read More

Help Protect Your Savings From Inflation Using I Bonds

June 2, 2022
In 1998 the US Treasury introduced Series I Savings Bonds (“I Bonds”) which are savings bonds for individual investors with interest rates linked to inflation. With inflation rates soaring, investors may be looking for options to help protect their portfolio against the ravages of inflation. Here is a quick primer on one compelling option in the fight against inflation: I Bonds. How do I Bonds Work? I Bonds are bonds issued by the U.S Treasury that earn interest based on a fixed rate and a variable rate that is adjusted twice a year based on changes in the Consumer Price Index for all Urban Consumers (or CPI-U).1 Current inflation is exceptionally high, so any I Bonds issued between now and October 2022 will earn interest at a 9.62% annual rate for six months.2 Interest is compounded semi-annually and added to the principal value of the bond. For example, if you bought $10,000 worth of I Bonds as of the date of this publication, you’d earn 4.81% (9.62% annual rate divided by 2) over the next six months and your I Bonds would then be worth $10,481 after six months. The variable rate component of your I Bonds will then adjust to the new rate that will be announced in October. The variable rate on your I Bonds will also adjust every 6 months after that based on the inflation rate at the time. The bonds will earn interest for the next 30 years or until you cash them out, whichever comes first. You are not permitted to cash out your I Bonds within 1 year of purchasing them. Also, if you cash them out before holding them for 5 years, you will forfeit the last three months of interest.3 How do I Buy I Bonds? I Bonds can only be purchased through the Treasury Direct website. They may not be purchased in or moved to a brokerage account, a 401(k), an Individual Retirement Account (IRA), a Roth IRA, etc. You can’t buy more than $10,000 worth of I Bonds electronically per person in a given calendar year.4 To purchase I Bonds electronically, you’ll need to set up an account on TreasuryDirect.gov and follow the instructions on the site to purchase your I Bonds. [+] Read More

Market Turbulence Amid Coronavirus Concerns

February 25, 2020
Global equity markets have experienced a pullback following heightened fears of the spread of coronavirus (COVID-19). This has left some investors wondering what actions they need to take (if any) with their portfolios. History has shown that equity markets typically rebound quickly in the event of a viral epidemic driven sell-off. The pullbacks have historically been short-lived and have typically been followed by a continued upward trend. 1 [+] Read More

Yield Curve Inversion and Recession Threats

August 15, 2019
Concerns over an inverted yield curve combined with the threat of higher tariffs around the globe have created some equity market volatility over the past few weeks. The ups and downs of equity market volatility can certainly be unnerving for investors, but volatility in and of itself is not necessarily a bad thing nor is it necessarily a signal of an upcoming recession. In fact, since 1980 the S&P 500 has suffered an average intra-year decline of 13.9% while the market has had positive returns in 29 of those 39 years.1 [+] Read More

End of Year Market Volatility

December 18, 2018
The recent pullback in global stock markets has caused some concern that the bull market in equities is winding down. There is even some concern that this pullback is among the initial signs of an upcoming recession. To gain some better historical perspective on the recent movement in the stock market, let’s take a look at historical intra-year market declines versus calendar year returns.1 [+] Read More

Mid-Term Election Year Volatility

October 26, 2018
Historically, equity markets have been very volatile in mid-term election years. Since 1962, the S&P 500 has had an average intra-year pullback of 19% in mid-term election years.1 In fact, equity market returns have historically been very tepid before Election Day in early November. In mid-term election years since 1950, the market has returned an average of just 0.96% in the first 10 months of the year, but markets have typically rebounded in the final 2 months of the year, returning an average of 4.24% across November and December. 2 The recent market pullback has wiped out 2018 gains and the S&P 500 is now roughly flat for the year. Again, historically the first 10 months of a mid-term election year are typically flat only to see a relief rally in the final 2 months of the year once the results of the election are known with certainty. Will history repeat itself in 2018? While it is nearly impossible to forecast stock market returns over a specific time frame (particularly for a brief 2-month window), there are reasons to be optimistic going forward: Corporate earnings remain strong3: 81% of the 140 companies in the S&P 500 that have reported third quarter earnings (as of October 23, 2018) posted earnings per share that beat Wall Street expectations, with only 10.7% of companies reporting earnings below expectations. Over the last 25 years, an average of 64% of companies reported earnings that beat Wall Street estimates with 21% of companies missing expectations.4 [+] Read More

Should Investors Stress Over an Inverted Yield Curve?

August 21, 2018
Despite Apple topping $1 trillion in market value, the unemployment rate continuing to climb down, and a multitude of other positive market indicators, the Treasury yield curve has begun worrying some market analysts. That said, we don’t feel that investors should worry too much about an inverted yield curve. Here’s why… The Treasury Yield Curve as an Indicator of Recession The Treasury yield curve is typically upward sloping where long-term yields are higher than short-term yields. The longer the time to maturity, the higher the risk to the bondholder since the longer-term bonds have a longer time horizon and are therefore exposed to more potential changes in interest rates than short-term bonds. This forces investors in long term bonds to seek higher yields in exchange for accepting the added risk of a longer maturity bond. What is the Treasury yield curve? The U.S. Treasury Yield Curve compares the yields of short-term Treasury bills (those with terms of less than a year) with long-term Treasure notes and bonds (notes have terms of two, three, five, and 10 years while bonds have terms of 20 or 30 years). Yields always move in the opposite direction of Treasury bond prices because low demand drives the price below the face value while high demand drives the price above face value. The yield curve becomes inverted when short-term yields are higher than long-term yields. An inverted yield curve does not happen very often, but it has preceded every recession in the U.S. for the last 50 years.1 What Causes an Inverted Yield Curve? [+] Read More

It’s the 2nd Longest Economic Expansion in U.S. History – How Long Can It Last?

June 6, 2018
Through April of this year, this economic expansion is now 106 months old. If the US economy continues to grow through May – which seems all but assured – it would make this economic expansion the second longest in US history. Looking out even further, if the economy continues to grow through July 2019, it would become the longest period of growth in the history of the country. There’s a real chance it could happen – in a recent poll of global fund managers by Bank of America Merrill Lynch, only 13% of them thought a recession was likely in the near term. Using Corporate America (earnings) as in indicator, the numbers also support the case for more growth: in Q1 2018, the blended earnings growth rate for S&P 500 companies is 24.5% as of this writing, which would mark the highest earnings growth rate the economy has seen in nearly eight years. [+] Read More

Are Stocks Attractively Valued?

May 22, 2018
Over the past couple of years, the S&P 500 Forward P/E ratio has been above its 25-year average. This has led some market commentators to warn that equities aren’t attractively valued. A Price to Earnings (P/E) ratio is a valuation measure that shows how much investors are willing to pay for a dollar of a company’s earnings. For example, a company that has a stock price of $30 and earnings per share of $2 would have a P/E ratio of 15 ($30/$2 = 15). A reading above the long-term average is typically interpreted to mean that stocks are expensive relative to the historical average. Similarly, a reading below the long-term average is typically interpreted to mean that stocks are cheap relative to the historical average. The recent pullback in equities to start the year coupled with continued strong earnings growth has left the S&P 500 Forward P/E ratio at 16.1x at the end of April 2018. The 25-year average S&P 500 Forward P/E ratio is exactly 16.1x. This marks the first time in over 2 years that this reading has not been above the 25-year average. [+] Read More