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The United States government is inching closer to its so-called debt ceiling X-date, when the Treasury could run out of cash and extraordinary measures to pay all government obligations, and both political parties remain at odds with no concrete solution to avoid a default.
And while the odds of the US government actually defaulting on its debt still remain relatively low — it would likely trigger an economic disaster and both sides of the political aisle have a lot to lose — Wall Street is wary of what the ongoing debate means for equity markets.
Defaulting on the US debt would be “potentially catastrophic,” JPMorgan CEO Jamie Dimon said last week. “The closer you get to it, you will have panic. Markets will get volatile, maybe the stock market will go down, the Treasury markets will have their own problems,” he said. “This is not good.”
Investors don’t appear to be panicking just yet; stocks rose modestly on Monday. But this fear of market volatility isn’t going away.
A similar fight around the debt ceiling in 2011 spurred a serious bout of market volatility. Wall Street’s key measure of volatility, the VIX, reached two year highs and soared more than 35% in just one day.
Between July and August of 2011, the S&P 500 fell about 17% — but interest rates were close to zero at the time, and the Federal Reserve was expanding its balance sheet. All of that provided a cushion for the US economy, said BlackRock analysts in a note on Monday.
With elevated inflation, interest rates at 5%, and credit tightening, “the backdrop is very different today,” they wrote.
“Brace for higher volatility because of the combined effect of debt ceiling concerns and financial cracks from rate hikes,” they said. Even if a deal is struck before the US Treasury runs out of money, they added, “we expect the debt showdown to stoke market volatility.”
Wells Fargo analysts agree. While they think a default is unlikely, they wrote on Monday, “the rekindled debate will likely increase volatility in both fixed income and equity markets.”
Volatility is key: A volatile market is bad for traders because it makes it harder to predict and manage risks effectively.
Wall Street typically uses the VIX, known as the market’s “fear gauge,” as a way to measure how investors feel about financial and economic uncertainties.
The S&P 500 and VIX typically move in opposite directions because a low VIX means calm and steady markets. However, when they move together, it suggests that the markets might be preparing for a sharp swing in one direction. That’s exactly what happened on Monday. The VIX was up 0.5% and the S&P 500 gained 0.3%.
Year-to-date the VIX is down more than 20%, which would generally indicate optimism in the market. But over the past month it has climbed about 8.5%.
How to play it: Invest in equities from developed markets outside of the United States, said Michelle Wan and Mary Anderson, analysts at Wells Fargo. In US markets, stick with relatively safe, large-cap stocks for now, they added.
By 2024, markets should be less volatile, they say. For now, it’s just about hunkering down and getting through the choppy second half of 2023 unscathed.
Still, during the debt ceiling standoff in 2011, the market declined, but rebounded very quickly, said Brad Bernstein, managing director at UBS Wealth Management. “We view any near-term pullbacks as buying opportunities,” he said.
Former Silicon Valley Bank chief says sorry
The former CEO of collapsed Silicon Valley Bank has returned from his holiday in Hawaii just in time for an apology tour. Greg Becker plans to say sorry to a Senate committee Tuesday, reports my colleague Allison Morrow.
“I never envisioned myself or SVB being in this situation,” Becker wrote ahead of the hearing, adding that he is “truly sorry for how this has impacted SVB’s employees, clients, and shareholders.”
Becker’s prepared remarks offer a defense of his leadership team’s efforts to manage risk and calm panicked depositors when rumors about the bank’s finances began spreading among SVB’s tight-knit, wealthy clientele.
He says inaccurate comparisons to Silvergate, a crypto lender that announced its liquidation days before SVB failed, helped fuel “an unprecedented bank run.”
Becker is scheduled to testify at 10 a.m. ET alongside two former executives of Signature Bank, which collapsed two days after SVB. Regulators were forced to take over both lenders after depositors rushed to withdraw their funds at once.
The banking crisis triggered by the collapses of SVB and Signature Bank will likely ripple through the economy for years to come.
SVB’s collapse was the largest bank failure since the 2008 financial crisis: It was the 16th largest bank in the country, holding about $342 billion in client funds and $74 billion in loans.
At the time of its collapse, about half of all US venture-backed technology and life science firms were banking with SVB. In total, it was the bank for about 2,500 venture firms including Andreessen Horowitz, Sequoia Capital, Bain Capital and Insight Partners.
Berkshire Hathaway sells entire stake in TSMC
The Oracle of Omaha is making moves.
Warren Buffett’s Berkshire Hathaway has sold its entire stake in TSMC, the largest chipmaker in the world.
In recent weeks, Buffett had repeatedly expressed concerns over the future of Taiwan, the self-governed democratic island where TSMC is based, reports CNN’s Michelle Toh. China’s Communist leadership has long claimed Taiwan as part of its territory, despite having never ruled over it.
In a Monday filing, Berkshire Hathaway (BRKA) disclosed that it was no longer holding a stake in Taiwan Semiconductor Manufacturing Company (TSM)as of the end of the first quarter.
In February, Berkshire revealed it had sold 86% of its shares in TSMC, which were purchased for $4.1 billion just months before. The quick sale was considered unusual because Buffett is known for making longer term bets.
Asked to explain his decision on an analyst call this month, the billionaire said: “I don’t like its location, and I’ve reevaluated that.”
“I feel better about the capital that we’ve got deployed in Japan than in Taiwan,” the Berkshire Hathaway chairman added. “I wish it weren’t sold, but I think that’s a reality.”
Despite the share sale, Buffett lauded TSMC as “one of the best-managed companies and [most] important companies in the world.”