Broker Check

The Weekly Wealth Report

May 30, 2023

THE WEEK ON WALL STREET

Markets moved in sync last week with perceived movement in debt ceiling talks, weakening early in the week and then surging on news of progress. A solid quarterly report and guidance from a mega-cap technology company helped with enthusiasm. Overall, the markets were mixed, with the Dow Jones Industrial Average down 1.00%, while the Standard & Poor’s 500 gained 0.32%. The Nasdaq Composite index led, picking up 2.51% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, sank 2.92%.

FACT OF THE WEEK

Santa Cruz, California, a favorite early haunt of author Ken Kesey and his Merry Pranksters, was an established capital of the West Coast counterculture scene by the mid-1960s. Yet just 10 years earlier, the balance of power in this crunchy beach town 70 miles south of San Francisco tilted heavily toward the older side of the generation gap. In the early months of the rock-and-roll revolution, in fact, at a time when adult authorities around the country were struggling to come to terms with a booming population of teenagers with vastly different musical tastes and attitudes, Santa Cruz captured national attention for its response to the crisis. On June 3, 1956, city authorities announced a total ban on rock and roll at public gatherings, calling the music “Detrimental to both the health and morals of our youth and community.”

It was a dance party the previous evening that led to this reaction on the part of Santa Cruz authorities. Some 200 teenagers had packed the Santa Cruz Civic Auditorium on a Saturday night to dance to the music of Chuck Higgins and his Orchestra, a Los Angeles group with a regional hit record called “Pachuko Hop.” Santa Cruz police entered the auditorium just past midnight to check on the event, and what they found, according to Lieutenant Richard Overton, was a crowd “engaged in suggestive, stimulating and tantalizing motions induced by the provocative rhythms of an all-negro band.” But what might sound like a pretty great dance party to some did not to Lt. Overton, who immediately shut the dance down and sent the disappointed teenagers home early.

It may seem obvious now that Santa Cruz’s ban on “Rock-and-roll and other forms of frenzied music” was doomed to fail, but it was hardly the only such attempt. Just two weeks later in its June 18, 1956 issue, Time magazine reported on similar bans recently enacted in Asbury Park, New Jersey, and in San Antonio, Texas, where the city council’s fear of “undesirable elements” echoed the not-so-thinly-veiled concerns of Santa Cruz authorities over the racially integrated nature of the event that prompted the rock-and-roll ban issued on this day in 1956.


 

MARKET MINUTE

Debt Talks Dominate
Stocks were weighed down for much of the week by stumbling debt ceiling negotiations, which appeared to reach an impasse at one point. Technology stocks, which have led the market this year, were under pressure as traders began to anticipate the possibility of rate hikes in June and July. Sentiment turned more optimistic after the release of an above-consensus earnings report and strong guidance from a mega-cap chip giant. The momentum continued into Friday as stocks surged on hopes of a debt ceiling agreement, undeterred by an inflation read that may induce the Fed to raise interest rates further.

A Fed Divided
The minutes of the Federal Open Market Committee (FOMC) May meeting reflected division among committee members over whether further rate increases were necessary, with more than half suggesting that they were ready to pause. Those members supporting additional rate hikes said inflation was moving too slowly toward the Fed’s two percent target inflation rate. The minutes also reaffirmed the Fed’s expectation of a recession beginning around the fourth quarter. In comments last Wednesday, Fed governor Christopher Waller manifested this division, saying that it was a toss-up as to whether rates should be raised, suggesting that he could support a rate hike in June or wait on voting for an increase until July’s meeting.

FINANCIAL STRATEGY OF THE WEEK

After months in and out of the headlines, the issues surrounding the debt ceiling have come into sharp focus, as the U.S. could become unable to pay its bills as soon as June 1. There’s nothing like an impending deadline to force action.

What is the debt ceiling? The debt ceiling is the amount of money the U.S. is authorized to borrow to pay its bills. Since the U.S. runs a budget deficit, the government is forced to borrow to make up the difference. Since Congress has the “power of the purse,” it sets spending limits and must approve any increase.

Why is this an issue? A debt ceiling “crisis” is nothing new. Historically, Congress has always suspended or raised the debt limit to ensure the U.S. avoided default. But as happens frequently with divided government, Washington D.C. is currently at an impasse. Republicans in the House passed a bill that would raise the debt limit in exchange for spending cuts. Democrats, on the other hand, are looking for a bill without conditions. A deal will need to be reached where both sides make concessions.

What if a deal is not reached? The U.S. failing to pay its bills in full and on time would have serious economic repercussions. In theory, a default could result in delayed payments of federal benefits, job losses, higher borrowing costs as U.S. debt is downgraded, and a global recession. The ramifications would be hard-hitting and unprecedented, which is why it hasn’t happened before, and probably won’t this time.

Where do we stand now? Stocks closed higher on Wednesday, May 17, 2023, after President Biden expressed optimism about debt ceiling talks, and both he and Speaker McCarthy expressed confidence that a default will be avoided. The President will return early from a trip to the G7 Summit to continue negotiations on Sunday. This is a good sign that, despite the harsh rhetoric from both sides, a deal will get done.

We know the markets don’t like uncertainty, so getting the debt ceiling issues behind us will be one less thing for markets to worry about. As your financial professional team, we’re here to help handle whatever is thrown at you and keep you focused on your financial goals.

If you have a specific question, please call Ashley at the office, and let's schedule some time to talk. We are here for you.