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The US could be approaching a 2011-style debt ceiling market meltdown, but worried investors shouldn’t abandon ship, Wall Street analysts say. Instead, they should jump on a ship (hypothetically speaking) and plant their money in overseas equities.
What’s happening: The US government has hit its $31.4 trillion legal debt limit and the Treasury is currently taking extraordinary measures just to keep the bills paid and the lights on.
Those extraordinary measures are mostly behind-the-scenes accounting maneuvers, Treasury Secretary Janet Yellen told CNN’s Christiane Amanpour — adding that they could stop working as soon as early June.
That means that if Congress doesn’t raise the debt ceiling by then, the US could default on its debt. That “would undoubtedly cause a recession in the US economy and could cause a global financial crisis,” said Yellen.
But lawmakers remain in a deadlock about whether to lift their self-imposed borrowing limit: Democrats want Congress to pass a debt ceiling increase without conditions but Republican leadership says that any debt limit increase should be accompanied by spending cuts.
Wall Street’s response: A debt ceiling meltdown creates serious risk for investors.
Markets plunged during the last major debt ceiling crisis in 2011 — that episode from a dozen years ago freaked out investors and prompted the loss of America’s perfect AAA credit rating from S&P. In the wake of the credit downgrade, the S&P 500 dropped by 15% and sectors with close revenue ties to US government funding — health care and defense — fell by 25%.
So what’s a spooked investor to do? Traders should be prepared for a “worse outcome,” said David Kelly, chief global strategist at JP Morgan. Kelly told CNN that they should consider creating a “debt-ceiling disaster emergency kit” that includes “high-quality international stocks and bonds, denominated in foreign currencies.”
Kelly’s not alone. In a research note Friday, Barclays European equity strategists said that Europe and the US were “decoupling,” with more upside in Europe. Lisa Shalett, chief investment officer at Morgan Stanley believes that American investors should consider putting their money into emerging markets this year.
Even if the debt ceiling debates are resolved, it’s not a bad idea to have some money invested abroad just in case of upheaval.
“You diversify because the things you don’t expect end up biting you,” Kelly said. Even without a meltdown, he explained, equities abroad have “relatively cheap valuations” and the dollar is still super strong, meaning US investors get a double discount in overseas markets.
Global equity markets have been outperforming the S&P 500 since mid-October. The MSCI All Country World Index (which excludes the US) has jumped by about 24% since its October lows. The S&P 500, meanwhile, has gained about 12%.
Focusing just on European stock performance, the euro STOXX benchmark has beaten the S&P 500 by more than 18 percentage points since September. That’s the most it has outperformed Wall Street by in 20 years, according to Morgan Stanley.
How to do it: Trading abroad is fairly simple as nearly every major US financial institution offers a smattering of global equities funds — some of those offerings are denominated in a foreign currency.
If investors are wondering how much to invest, Kelly has a simple solution. About 60% of global stocks are listed in the US and about 40% of equities are listed elsewhere — a well-hedged portfolio could have the same distribution, he said.
Of that 40%, about 28% of global stocks are traded on European exchanges and the other 12% are in emerging markets (mostly in China).
The last few decades have been full of unforeseen market meltdowns, said Kelly. It wouldn’t hurt Americans to invest in foreign equities … just in case.
Soft landing? Not so fast.
Wall Street may be getting its hopes up for an economic “soft landing” instead of a full-blown recession. News flash: Corporate America isn’t as optimistic as investors are.
Executives at top companies continue to sound far less sanguine about the economy’s prospects.
Verizon (VZ) CEO Hans Vestberg said during the company’s earnings conference call with analysts Tuesday that it is a “difficult economic environment” and that there is still “elevated inflation.”
3M (MMM) CEO Mike Roman said in its earnings release that “we expect macroeconomic challenges to persist in 2023.” The Post-it sticky note maker joined the parade of notable companies announcing job cuts, too, with plans to lay off about 2,500 workers.
Healthcare giant Johnson & Johnson (JNJ) also discussed concerns about the economy in its earnings call. And General Electric’s (GE) 2023 profit outlook was well below forecasts.
It seems a bit Pollyannaish to think that the US economy can avoid a recession entirely. After all, the Federal Reserve aggressively jacked up interest rates last year in order to combat inflation … and the Fed is probably not done raising rates just yet either. That should slow the economy.
Yes, the labor market continues to hold up reasonably well. That is feeding hopes that the economy may not fall off a cliff. But there is still likely to be some pain in the job market, as already evidenced by the raft of layoff announcements in the tech, financial services, retail and media sectors.
With that in mind, the CFO of credit card company Synchrony (SYF) said on an earnings call Monday that in a “mild recession,” the unemployment rate should be closer to 5%. That’s still historically low … but it’s a lot higher than the current level of 3.5%.
NYSE market mania
The New York Stock Exchange experienced a technical issue Tuesday morning that led to a brief trading halt for dozens of major companies just after the market opened. As a result of the issue, some trades that occurred before the halt will be made “null and void,” according to an exchange representative.
Overall, more than 250 stocks were impacted, including such major names as Verizon, McDonald’s, Morgan Stanley, AT&T, Nike, Mastercard, Uber, Wells Fargo, Shell, 3M, Sony, UPS, Visa, Walmart and Exxon Mobil, according to the NYSE.
Many of those stocks made large moves just minutes into the morning trading session, sending the shares of companies like Wells Fargo and Morgan Stanley into a nosedive.
So what happened? We’re not yet sure of the why (the US Securities and Exchange Commission is investigating the issue) but we do know the what.
Stocks typically open for trading on the NYSE at 9:30 a.m. ET, and each stock is given an “opening price” that is determined by the thousands of orders that accumulated overnight and early in the morning ahead of the opening bell. The exchange compiles these buy and sell orders and formats a single price. That price is then quoted at the open and is known as an “auction print.”
In an emailed statement, exchange officials said opening auctions “did not occur” for a number of these stocks, after a “system issue” prevented the accumulated orders from being compiled into the opening price of some stocks on Tuesday. That meant those shares opened with supply-demand imbalances at prices very far from where they closed on Monday.
The exchange said that the trades made before an opening price was printed will be reviewed as “clearly erroneous” under their rules and could be declared null and void.