Market Recap 6/2/2023

Time to Move On

After all the anxiety and angst, you mean to tell me that’s it?  No debt downgrade, no whiff of default, not even a market tremor or two?    Debt ceiling pantomime.  But the deal is done and the can is kicked for another couple years.   Highlights of the package include:


  • Two-year suspension of the debt ceiling until January 2025.  Note that this is a suspension, not an increase.   The debt ceiling will simply be reset at wherever debt levels land in two years.  


  • The bill cuts so-called nondefense discretionary, which includes domestic law enforcement, forest management, scientific research and more — for the 2024 fiscal year. It would limit all discretionary spending to 1% growth in 2025, which is effectively a budget cut, because that is projected to be slower than the rate of inflation.


  • Defense and veterans' health care spending are not included.


  • The Federal government will claw back $28 billion in unspent COVID-19 funding and $1.4 billion of the extra funding pledged to the Internal Revenue Service as part of the Inflation Reduction Act.


  • It also ends the moratorium on student-loan repayments that had begun early in the pandemic and removes the president's ability to extend the pause again. Republicans said this was costing the government roughly $5 billion per month.


This quote below from The Economist sums things up:  


“The Congressional Budget Office, a neutral scorekeeper, calculates that it will reduce spending by about $1.3trn over the next decade. When cuts are measured in the trillions rather than the billions, they are, by definition, big. The trouble is that federal spending is in the tens of trillions: the CBO expects about $80trn in outlays over the next decade. Moreover, its debt-deal estimates are too optimistic. Side agreements between the White House and Kevin McCarthy, the Republican speaker of the House, will soften the reductions. Donald Schneider, a budget expert, thinks that creative accounting alone could shave off more than $90bn from the cuts. And crucially, spending caps are only enforceable in 2024 and 2025.”


So that’s it, then, for the scary headlines? Oh, if only!!   The Treasury is basically broke.   The chart below shows how much cash the Treasury has on hand at the moment.  The cupboard is pretty bare.


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How do they refill the coffers?   They are going to issue a lot of bonds to raise cash.   The next round of ‘doom and gloom’ headlines will be about the flood of bonds coming to the market and how rates can do nothing but go up.  Maybe, but as the chart shows, we’ve seen this movie before at least three other times since 2013.  Rates may be pressured higher over the short-term, but it wouldn’t be a shock to see the Fed adjust their quantitative tightening program to accommodate the new supply.


I guess the good news is that we can ignore any article related to the debt ceiling until 2025.


Is a Narrow Market Bearish?


The financial press is also making a big deal of how narrow the market advance has been this year.  On this topic they are spot on.  For example, the percentage of stocks beating the S&P 500 index over the last three months is as low as it’s been since the tech bubble of the late 90s (the chart below goes back to 1993).  


Another way to show this is through the total return for the S&P 500 weighted by market-cap versus the equal weighted version.  Since the beginning of February, the S&P 500 (blue) is up +3.2% while the equal-weighted version of index (orange) is down -7.1%.


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This means the big, large-cap stocks like NVIDIA, Google, Apple, etc. have been driving the bulk of the market gains this year.  How big is the spread between the market-cap and equal weighted versions of the S&P 500?


Well, as big as any time since 1990.


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The natural response in the press is that this is bad news.  It can’t continue (which it probably can’t) and is the sign of market exhaustion before a final fall.


On the last point, again, we’ve seen this movie before.  The chart below shows the difference between the average six-month return of the top 5 S&P stocks versus the index itself.  There have been a number of instances when this has exceeded 20% since 1990.  



Have we historically seen the broad market get smashed when only the biggest stocks are winning?   Not really.  Subsequent three-month, six-month, and twelve-months returns after the above ratio exceeds 20% have been solid and far in excess of average (base) returns.  



But what we do typically see is a broadening out of the market.  The big winners stop winning as much, and other smaller stocks kick into gear.   Time will tell if this cycle plays out the same way.


(Other) Charts We Found Interesting


  1. There was something for everyone in Friday’s payrolls report.  Job growth blew away expectations with a gain of 339,000.  But unemployment ticked up to 3.7% from 3.4%.    



  1. The payrolls report went over well with the market because it showed that wage growth continued to slow.  Slower wage growth = less inflationary pressures = a Fed pause this month.  



  1. But even if the Fed chooses to pause on June 14th, the market is betting they might hike in July.  Larry Summers was out today calling for a half-point hike next month if there’s a pause in a couple weeks.   


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  1. Why did the debt-ceiling showdown fizzle?  Fiscal austerity simply isn’t a vote winner.



  1. From The Economist:  ‘Before the end of this century…the number of people on the planet could shrink for the first time since the Black Death. The root cause is not a surge in deaths, but a slump in births.’ 



  1. The other big news item is AI.  Will it cure cancer, put half of us out of work, or wipe out humanity?  Today’s debate is both old and new at the same time.



  1. The gap between German and American working hours is widening.  A 500-hour differential on average – doesn’t seem like much.   Oh wait, that works out to over twelve weeks!!     



Have a good weekend


Charles Blankley
Chief Investment Officer
Gemmer Asset Management LLC

Published by Gemmer Asset Management LLC. The material presented (including all charts, graphs and statistics) is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The material is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment obj