Debt Ceiling and Default
With market anxiety increasing daily as the deadline toward a default grew closer, President Biden and House Majority Leader McCarthy reached a consensus Saturday evening to increase the country’s debt ceiling in return for [see fine print, somewhere]. Congress is expected to read said fine print and vote on the proposed legislation as early as Wednesday.
Could it still blow up? Yes. With politics these days, there is no predicting. So, fingers crossed until the vote.
The buzz around artificial intelligence (AI) began in earnest in November of last year when OpenAI released to the public its first rendition of the ChatGPT large language model. The buzz became a thunderclap on May 24th when Nvidia (NVDA), whose chips train and deploy generative AI applications like ChatGPT, posted its quarterly earnings and included an outlook that left the financial models of already bullish analysts in the dust.
On Tuesday, the stock reached the rarified air of those few companies with a trillion dollar market cap.
How much has the fervor around AI helped the market? Consider that the S&P 500 is a market cap-weighted index of US large- and mid-cap stocks, meaning that the largest stocks by market cap have an outsized influence in the total returns. The Top 5 stocks in that index, Apple, Microsoft, Amazon, Nvidia, and Alphabet (formerly Google) are all AI plays. And the index is up over 9% YTD.
Now consider that the S&P 500 Equal Weight Index, in which all 500 stocks in the index have equal statistical significance (or weight) is actually red for the year.
What Will June Bring?
Will the House and the Senate sign off on legislation to raise the debt ceiling to avoid a catastrophic default? We’ll know in a few days. Will AI plays continue to power the market to greater heights, or is Nvidia and the others over their skies and due for a pullback? June should tell us.
And lest we forget…
- Inflation may or may not be under control (if the latter, expect more Fed intervention), and
- The banking crisis that seemed so scary just weeks ago may or may not rear its ugly head again, and
- China’s economy is losing momentum, and
- There are persistent financial troubles in the real estate industry.
Stay cautious, but don’t let fear rule.
And For What It’s Worth…
If you were even remotely aware of television back in the 70’s, you couldn’t help but catch an episode or two of The Brady Bunch, the comedy sitcom about a fictional blended family where Mike and Carol Brady raised six children with the help of trusted maid Alice.
Well, their house is on the market. That is to say, the Los Angeles home made famous by exterior shots in the TV series is on the market. Claimed to be the second-most-photographed home in the country after the White House, it can be yours for $5.5 million.
The home was purchased by HGTV in 2018, and the cable network tapped their two star siblings, the Property Brothers, to remodel it into a mirror image of the 70’s set. See the listing on Zillow.
Sadly, 2023 is not 1973. If the same fictional family were to buy the home today, there would be no time for comedy shenanigans; every man, woman, boy and girl therein would need to be hustling side jobs like nobody’s business to try to make the mortgage payment of $35,000 each month.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models (it has still managed to outperform the S&P 500 over the long run).
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the new Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.