May 5, 2023
The technical setup for the S&P 500 remains challenging into strong resistance in the mid-4100s. Bearish momentum divergence seen on 4/20 and 4/21 has forecast value for another week. Near-term support sits in the 4010-4040 range. A break below 4010 would trigger a number of systematic sell signals and lead to accelerated downside momentum to 3760. The one challenge with remaining tactically bearish is that sidelined cash in nominal terms is already at record levels and a break above ~4200 would likely lead to performance chasing.
The debt ceiling issue is different than budget debates that sometimes cause a government shutdown. We’ve seen almost 30 government shutdowns over the last 50 years. A shutdown amounts to little more than a paid vacation for some government employees. Essential services continue to operate and payments to social security, Medicare and other government recipients continue. None of those payments would be made in the event of a technical short-term default and this alone could cause a recession. A loss of confidence would likely have a larger impact on economic growth, particularly given the current regional banking crisis. Researchers for the US Economic Policy Uncertainty Index said the confidence shock prior to a near-technical default in August 2011 was enough to impact the economy. Markets should begin to reflect a potential crisis of confidence at least two weeks before the assumed ex-date, which moved to sometime in June this week from what was earlier assumed to be August. Pulling forward the ex-date has been attributed to lower than expected-tax-receipts, which we can assume came from reduced capital gains. In the past, pricing a potential technical default has resulted in a flight to quality that benefits intermediate (5-10 year) Treasuries, the US dollar and gold. Of course, risk aversion hurts equities and often results in a surge in volatility.