Running with sharp objects is dangerous

Stocks traded lower yesterday as debt ceiling talks weighed on investor sentiment… for obvious reasons – inaction being at the top of the list. According to minutes from their last meeting FOMC members are divided on whether to keep rates here or whether to raise them higher.

Double-sided saber. I wanted to start this morning’s note with a chart. I mashed my keyboard’s keys furiously and ended up with something like “SPX Index GP 01/01/2011 – 12/30/2011” and then pressed the <GO> button. That is the cryptic way in which I can pull up a line chart of the S&P500 for the year of 2011 on my Bloomberg. I quickly zoomed in on the month of August, which I recall featured a precipitous drop in equity markets. I found the drop and measured it. I was around -16% from top to bottom. Do you remember the summer of 2011. Specifically, late July through early August. Probably not and I understand, because it was so long ago.

Friday, August 5^th was a dreary, overcast day on Wall Street but it was still warm, in the mid to high 70s (low to mid 20s in Celsius for my non-US readers). That would not be considered too hot by August standards, but if you stepped into the iconic New York Stock Exchange building, the temperature was scalding hot. The Great Recession and Global Financial Crisis still loomed large in the rearview mirror, and many economists feared that a double-dip recession could be coming.

That day in Washington DC, the weather was partly cloudy, and temperatures were nearly 90 degrees (32 degrees Celsius). That is considered hot. If you walked into the US Capitol, the temperature was frosty cold. With your teeth chattering, you could see through the low hanging frost, Representatives huddled in two masses, one on the right side of the chamber and one on the left. Can you give a guess what it was that they were so far apart on? Go on, give it a go. THE DEBT CEILING. There it is, now you remember. It was one of those many times where politicians were politicking, in the name of the greater good, and causing havoc to your 401k, and indeed, THE US ECONOMY. It was not just the economy.

The bell on the floor of the Stock Exchange rang at exactly 4:00 PM, as it always had, and traders rushed home to recover over the weekend. What they got, was anything but rest. On Saturday, Standard & Poor’s, the credit rating agency, downgraded the United States’ credit rating from AAA to AA+!!! Moody’s also warned that it was pondering a downgrade as well. The political bickering technically yielded a debt ceiling hike… earlier in the week, but market sentiment was sour and there was a sovereign debt crisis going on in the EU with Italy and Spain. All that was enough to get the still-tarnished-from-the-2008-mortage-crisis Standard & Poor’s agency to cut the rating enjoyed by the US since 1941. You can be sure that there were some salty tears in the Sunday beers of Wall Streeters. Monday came and the markets’ performance on that day earned it the moniker “Black Monday.” The S&P and Nasdaq fell by -6.66% and -6.90% respectively. Monday’s temperature in the exchange took blazing hot to a new height. The US was punished for its inability to deal with a pending default as a result of political bickering. Stocks fell, and the cost of borrowing for the US went up, thanks to a credit downgrade.

So here we are, a windy and somewhat cool day in late spring of 2023, all of us wiser, and most of us weary from the past several years of an emotionally charged market. In DC, politicians are rattling sabers as they had way back in 2011. The case for a late-year recession is building and the Fed is giving us some tough love talk on monetary policy… and we still have high inflation. It is not nearly Friday, but this morning, Fitch, another credit rating agency has put out a warning that it may lower the credit rating on US sovereign debt. Mind you it is just a warning and index futures are buoyant, thanks in part to a big post-market beat by NVIDEA. No one is panicking just yet, and hopefully a crisis, AND A DOWNGRADE, will be avoided. I decided against the chart, because I am sure that you get the picture. I am not sure how many DC insiders read my daily note, but I am hoping that some of them not only remember the story of August 2011, but also that they got the moral of the story.

WHAT’S SHAKIN’ THIS MORNIN’ 💨☀🌤🌧

NVIDEA Inc (NVDA) shares are higher by +27.68% (not a typo) after it beat the pants off the estimates. The company provided current quarter guidance that exceeded analysts’ expectations. The big surge in business is the result of increased orders to fill data centers with AI specific chips, which NVDA is known for, among other things. Dividend yield: 0.05%. Potential average analyst target upside: +39.4%.

Carnival Corp (CCL) shares are higher by +2.62% with high volume in the premarket after Citi upgraded the company to BUY from HOLD on industry momentum. Citi also raised Carnival’s price target. The company is expected to announce earnings in late June. Potential average analyst target upside: +14.6%.

YESTERDAY’S MARKETS 📈📉

Stocks dipped yesterday as debt talks stalled the night earlier. The S&P500 slid by -0.73%, the Dow Jones Industrial Average fell by -0.77%, the Nasdaq Composite Index traded lower by -0.61%, and the Russell 2000 Index dropped by -1.16%. Bonds pulled back and 10-Year Treasury Note yields climbed by +5 basis points to 3.74%. Cryptos fell by -3.24% and Bitcoin declined by -3.02%.

NEXT UP👓

• Initial Jobless Claims (May 20) is expected to come in at 245k, slightly higher than last week’s 242k claims.
• GDP Annualized QoQ (Q1) is expected to come in at +1.1% in line with prior estimates.
• Pending Home Sales (April) may have grown by +1.0% after falling by -5.2% the month before.
• Fed speakers: Barkin and Collins.
• Earnings after the closing bell: Costco, The Gap, Workday, Autodesk, Marvell Technology, Ulta Beauty, RH, and Deckers Outdoor.