By: Zach Brody, CFP® & Lina Botchoukova
The state of the markets is constantly changing, with various factors impacting investor sentiment and market volatility. One of the most pressing concerns currently facing the financial markets is the US debt ceiling. This is the maximum amount of money that the US government is allowed to borrow, and it was last raised by $2.5 trillion to a total of $31.4 trillion on December 16, 2021.1 On January 19, 2023, that limit was reached, and the Treasury announced a “debt issuance suspension period” during which, it can take “extraordinary measures” to borrow additional funds without breaching the debt ceiling. The Congressional Budget Office projects that the government’s ability to borrow using extraordinary measures will be exhausted by mid-June, 2023.2 Failure to raise the debt ceiling could lead to a government shutdown and a default on the Federal’s government obligations. Such default would have a significant ramification for the US and global economy and will likely lead to a financial crisis and a recession.3 In 2011, the government came near-default, which caused the US to lose its AAA credit rating from Standard & Poor’s.4
Another factor impacting the state of the markets is China’s economic recovery slowing down, from high youth unemployment to faltering real estate market. This has been a growing concern for investors, as a weakened Chinese economy could have ripple effects on the global economy. In late April, China’s cabinet unveiled plans to boost employment and trade as the government tries to meet its modest growth of about 5% for 2023.5 Economists from around the world suspect rising unemployment, persistent disinflation, falling interest rates and weaker currency could all be challenges that China has to work through.6 There are also concerns that China’s youth unemployment is at ~20%.
Corporate earnings for the first quarter have been coming in better than expected, however the blended earnings decline for the S&P 500 is -2.5% based on the 92% of S&P companies that have reported. If -2.5% is the actual decline for the quarter, it will mark the second straight quarter that the index has reported a decline in earnings. For 2Q 2023, analysts are projecting earnings decline of -6.3%. for 3Q 203 and 4Q 2023, analysts are projecting earning growth of 0.7% and 8.1%, respectively.7
The migrant issue is another hot topic impacting the state of the markets. The Title 42 policy, which allows the US government to expel migrants at the border without allowing them to seek asylum has been lifted.8 As a result, there is a surge in the number of migrants trying to enter the US, which could have significant ramifications for the economy and political landscape. Investors are closely watching developments in this area and considering the potential impacts on various industries and sectors.
The ongoing Ukraine war is also a major factor impacting the state of the markets. The conflict has already had significant humanitarian and economic consequences, with rising energy prices and disrupted supply chains. The uncertainty surrounding the outcome of the war is causing anxiety among investors, who are hoping for stability and a resolution to the conflict in the near future.
Overall, the state of the markets is complex and constantly evolving. While there are a number of factors currently contributing to volatility and uncertainty, investors should focus on the long-term fundamentals of the economy and carefully consider the potential risks and rewards of various investment strategies. By staying informed and vigilant, investors can navigate the changing landscape of the financial markets and make informed decisions about their portfolios.