The drama going on in D.C. over the debt ceiling is terrible to watch, but investors can't seem to take their eyes off the drama. History shows that it's typically a lot of drama for nothing. It reminds me of one of my favorite movies from the late '80s - "Road House."
At the time, Patrick Swayze was one of the hottest names in Hollywood. When Road House was released in 1989, he was two years removed from the surprise hit in "Dirty Dancing." It's one of those iconic films that really doesn't have a great plot and the acting (maybe more directing) isn't very good. However, if you're flipping channels and it's on, you find yourself watching to the end of the movie. Here's some great trivia on the movie:
As I mentioned, Swayze was so popular during the filming of Road House, that it caused problems. A group of middle-aged blonde women pulled up in a pickup truck in the middle of filming to get close to Swayze. During the fight scene by the river, a boat full of female Swayze fans floated by as filming was in progress. A female extra playing a waitress spilled drinks all over another extra during filming because she was too busy staring at Swayze.
Due to injuries sustained on the set of Roadhouse, Swayze had to pass on two roles - Gabriel Cash in "Tango & Cash" (a movie we'll likely highlight in a Market Musing in the future) and Mike Harrigan in "Predator 2." Don't cry too hard for Swayze as he ended up with the starring role in "Ghost," which was a runaway hit in 1990.
All of the actors in the movie did their own stunts. They were all trained by Benny "The Jet" Urquidez, holder of 9 black belts and a competitive kickboxer.
In the opening scene, while the credits are still rolling, we see Dalton's Mercedes parked in a garage. It's the same garage where Reggie Hammond's Porsche was stored in the movie "48 Hours."
Here's what we've seen so far this week...
Debt Ceiling Drama. Have you ever seen prima donnas argue over money? Well, you have if you've paid attention to the drama in D.C. this week.
One meme surrounding the debt ceiling that caught my eye this week comes from my favorite satirical website "The Babylon Bee." It displays a picture of Congress with the fake news headline, "Nation Unsure How The Government Not Being Able To Borrow More Money Is A Crisis." Do we really think a debt ceiling compromise won't happen, eventually? We've sent more than $76 billion in aid to Ukraine - are you telling me that we can't negotiate to pay our bills on time?
As we stated two weeks ago, the U.S. has either raised, extended, or revised the debt limit 78 separate times since 1960 - never failing to meet obligations. The reality is that back in March the House voted on a budget package and communicated that it would be dependent on debt ceiling negotiations. Both sides stood in wait (which they almost always seem to do) so that one side might be able to force the other side's hand. And, they are playing this game with taxpayer money - not their own. The two sides seem to be unwilling to move on the following key items:
The GOP is demanding that future spending (2024 and beyond) needs to be cut down from COVID benchmarks.
Democrats want to close tax loopholes and increase drug price negotiations for Medicare.
Democrats have offered to freeze spending this year, but are unwilling to reduce spending in future years.
The key battle is over "discretionary" spending, which neither side is willing to yield on - Dems want it the same or higher and the GOP wants it reduced.
In the long run, it's not going to affect market returns much, if history is any guide. During the last 5 debt ceiling crises, 3 of the 5 led to government shutdowns (not necessarily a bad thing). Only 1 of the last 5 yielded negative returns as measured by the S&P 500 Index. The average return during the last 5 debt ceiling debates was +0.2% (or, basically flat). However, the average 1 month following the last 5 debt ceiling crises was +2.5%. Again, if history is any guide, perhaps investors should stay invested or be fully invested. Note: as of this posting, GOP leadership and the White House are telegraphing a compromise could be reached soon - we'll see.
Just Be Nice. It's easy for investors to be concerned over emotional issues like the debt ceiling. However, typically these shocks are temporary in nature. Investors at this point need to learn to relax. It reminds me of Dalton's famous quote in Road House as he's instructing the bouncers how he wants them to operate going forward for the fine establishment known as the "Double Deuce" when he says, "All you have to do is follow three simple rules. One, never underestimate your opponent. Expect the unexpected. Two, take it outside. Never start anything inside the bar unless it's absolutely necessary. And three, be nice."
If we begin with the underlying fundamentals, financial conditions are loose and growth is still prevalent. First, the National Financial Conditions Index, tracked by the Chicago Federal Reserve, it at the lowest level (meaning financial conditions are loose) in more than 3 months. Of the 105 contributors to the index, 93 (89%) are looser than average.
The current estimate of 2nd quarter GDP tracked by the Atlanta Federal Reserve is +2.9%. Of the primary components of the GDPNow estimate, Consumer Spending has been revised higher from +0.8% in late April to +1.1%. Last week's release of Retail Sales showed a consumer that is steady with a vast improvement in sales in April versus March. And, yesterday's Jobless Claims number came in lower than expected with last week's number being revised down by nearly 20,000. This morning's report on Personal Income showed a slight improvement month-over-month and Personal Spending for April rose more than expected and was considerably higher than March's reading.
Others have tried to worry investors by claiming the recent rally by equities is nothing more than a "Bear Market Rally." However, an analysis of Bear Market Rallies suggests that the current level of the S&P 500 Index is 10% higher than the typical, median Bear-Market Rally level. Even more recent data provided by Goldman Sachs' trading desk, suggests that mutual funds are reducing cash positions in favor of buying equities.
We'll have to wait and see when the two sides can come to an agreement on the debt ceiling. For now, it's probably unwise for investors to make considerable changes to asset allocations by panicking or moving into cash.
If you've never seen the "Be Nice" speech in Roadhouse, here's the clip to add to your movie education...
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