January 23, 2023 •Nathan Willis
Key Events: The government is hitting its debt limit
The US bumped up against the debt limit this week. Congress created the first aggregate debt limit in 1939, and it became a political tool to influence government spending in 1953 under President Eisenhower. Congress has raised the limit routinely since then but has increasingly used the issue as a political weapon in the last quarter century.
A look at the federal surplus/deficit as a percentage of GDP (in the chart below) highlights the issue. Deficits increased significantly during the global financial crisis and again during the pandemic; hitting the debt limit has highlighted the need to control spending. It remains to be seen how Congress and the White House will address the issue in a lasting way.
Market Review: A strong start stalls, recovering on Friday
The market provided strong returns for the first couple of weeks of 2023, but they stalled out this week - even after a strong upward move on Friday. The S&P 500 lost 0.6%, bringing the YTD gain to 3.5%. Most markets ended the week with small losses, but high-quality bonds performed well as economic data softened and recession risks remained at forefront of investors’ minds.
Outlook: Earnings season = volatility
Markets are anticipating the earnings season while also digesting volatile economic data and Fed speeches. The Fed is delivering a consistent message that rates will remain high, but the market sees softer economic data as a way to escape that path. It seems likely that the market will react to any earnings that come in below expectations in a similar manner.
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