The ETF Portfolio Strategist: 28 May 2023
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Global markets eased ahead of the long US-holiday weekend. Will the deal announced late Saturday by President Biden and House Speaker McCarthy to lift the debt ceiling change investor sentiment for the better? Maybe. This news certainly doesn’t hurt. But there are still several hurdles to navigate before the bill becomes law, starting with an expected vote on Wednesday in the House. If the voices of reason prevail, the Senate gauntlet is next.
Before the legislation reaches Biden’s desk will almost certainly require a bipartisan majority in both chambers of Congress. As the President advised when he announced the deal late last night, “The agreement represents a compromise, which means not everyone gets what they want.”
The question is whether enough Democrats and Republicans in favor of the deal will overcome the critics from both parties — twice: once in the House and again in the Senate? Biden and McCarthy are optimistic and, given the stakes, it’s reasonable to assume that Congress will collectively vote in favor of sidestepping default by passing the bill. Failing that, it seems unlikely there will a second chance ahead of June 5, when Treasury Sec. Yellen estimates the government is set to run out of cash.
Alas, nothing’s certain. McCarthy earlier today effectively issued a warning by noting: “Right now the Democrats are very upset. But one thing [House Minority Leader] Hakeem [Jefferies] told me: there’s nothing in the bill for them. There’s not one thing in the bill for Democrats.”
Several Republicans trash-talking the deal too. Rep. Bob Good of Virginia, for example, tweeted: “No one claiming to be a conservative could justify a YES vote.”
In other words, it’s still touch and go. The odds are now skewing a bit more in favor of resolving the debt-ceiling crisis, but it’s going to be a long week as Biden and McCarthy twist arms in their respective parties in the hours ahead.
Meantime, all the other risk factors of late are waiting in the wings to bedevil markets anew if and when Congress gives the green light to the Biden-McCarthy deal. That includes renewed expectations that the Federal Reserve will continue to raise interest rates at the upcoming June 14 FOMC meeting. Following Friday’s news of a better-than-expected gain in consumer spending in April, Fed funds futures lifted the implied probability of a 1/4-point hike next month to 64%.
Given all the risks swirling about, no one should be surprised that the benchmark for our 16-fund global opportunity set continues to hold more or less steady in a tight range. G.B16 slipped 0.5% last week, reversing the previous week’s 0.4% gain. See this summary for design details on the strategy benchmarks and this summary for how the metrics in the tables below are calculated.
US stocks bucked the general pullback: Vanguard Total US Stock Market ETF (VTI) rose for a second week, edging up 0.3% and closing near the high for the year.
Most of the G.B16 funds lost ground last week, led by shares in Europe (VGK), which fell 2.3%.
What happens next is mostly bound up with how Congress votes on the debt-ceiling bill. It’s tempting to assume that Washington will dodge a bullet. Then again, the fact that the impasse has been allowed to come this far and put the economy on a precipice is a reminder that assuming high-stakes incentives will win the day is more precarious than it appears. The case for staying defensive, in sum, still looks compelling until it’s clear that the US government is no longer the biggest threat to portfolios on the near-term horizon ■