Stock Portfolio Updates: Fed Debt Limit Changes & S&P 500 Performance
By: Christopher Mistal
May 11, 2023
Aside from the Fed and interest rate hikes, we have recently been increasingly concerned about the Federal debt limit drawing comparison to 2011 when S&P 500 peaked on the final trading day of April and fell 19.4% to its final low on October 3. According to Treasury Secretary Janet Yellen’s most recent letter to Congress on May 1, extraordinary measures currently being used by the U.S. Treasury are likely to be exhausted as soon as June 1. Since the release of this letter, outside analysis by numerous firms supports the deadline given by Secretary Yellen.
Without going into the complex history of the federal debt limit and the politics involved, we tracked down a list of dates that the federal debt limit has been changed. I say changed, because as hard as it is to believe there were times when the limit went down. The debt limit has also used a time component, think of it like the “best by” dates that are commonly found on most items at the local market. And there have been times when the limit was suspended, but the suspension came with an end date. The list of debt limit changes includes times when the limit was changed, date was extended, or when a suspension came to an end. In total, there are 87 previous times since 1950, the federal debt limit has been changed, increased, decreased, time extended, suspended or suspension ended.
[30 Trading Days Before and 60 Trading Days After Limit Changed Chart]
In the above chart the average S&P 500 performance the 30 trading days before and 60 trading days after all 87 previous debt limit changes have been plotted across three timeframes. On average, the impact on the S&P 500 has been negligible as most of the debt limit changes occurred without meaningful controversy or crisis. However, in the more recent timeframes, as debate has dragged out to the last minute, the impact appears to be increasing. S&P 500 average performance around recent debt limit changes has slipped, and volatility appears to have increased based upon the choppiness of the Since 1990 blue line.
[S&P 500 Performance After Debt Limit Changes Table]
In the above table the S&P 500 performance over the 1-, 2-week, 1-, 2-, and 3-months after a debt limit change is presented. Generally, the S&P 500 has responded positively following a debt limit change with average gains and the frequency of gains exceeding 60% across all five time ranges. Significant negative performance was seen around the financial crisis of 2008-2009 and in 1987, but there was no meaningful controversary in those years about the debt limit.
The current debt limit dispute and its comparison to 2011 remains a concern. S&P dropped 16.7% in about three weeks from July 22 to August 8 as Moody’s & S&P put the U.S. credit rating on notice in July and then S&P cut the U.S. credit rating August 5. S&P would drop another 1.8% to the October 3 bottom. Secretary Yellen’s projected deadline is quickly approaching. Market volatility is likely to rise and remain elevated until a resolution is reached. We still see a range bound market through the Worst Months. Upside is likely to be limited, but the lows of last year will likely hold.   
Stock Portfolio Updates
Over the last four weeks since the last update through yesterday’s close (May 10), S&P 500 advanced 1.1% while Russell 2000 fell 0.8%. Over the same period the entire portfolio slipped 1.4% lower, excluding dividends and any trading fees. Large-cap positions slumped the most, off 5.5%. Mid-caps were only modestly less bad, down 3.7% while our two small caps collectively slipped 2.7%.
After a modest rally in early April, large-cap, healthcare stocks, Elevance Health (ELV) and UnitedHealth Group (UNH) retreated briskly. In last week’s issue we examined the best sectors of the Worst Months. Historically, healthcare is third best by average performance and its frequency of gains at 69.7% is in a three-way tie for third best. ELV can be considered on dips below $450 while UNH can be considered on dips below $485. Should ELV and UNH trade below their buy limits, we will officially add to the existing positions.
AT&T (T) also weighed on large-cap performance. Higher interest rates and soft Q1 earnings appear to be the main reasons for recent weakness. T’s main draw is its dividend, but that has faded as interest rates have risen. With many projecting rate cuts from the Fed later this year or early next at the latest, continue to Hold T.
Mid-cap positions were dragged lower by Digi International (DGII) and Perion Network (PERI). DGII has been somewhat of a disappointment since its addition to the portfolio last fall. It was closed out of the portfolio on April 26 after it closed below its stop loss. PERI was the opposite. It had enjoyed solid gains and was nearing its all-time highs in early April. That momentum quickly faded, and PERI was stopped out of the portfolio on May 4.
Super Micro Computer (SMCI) is a bright spot in the portfolio. Earnings were respectable and management issued upbeat guidance which sent shares soaring to a new all-time high last week. SMCI has held the gains and is on Hold.
All positions not previously mentioned are on Hold. DJIA and S&P 500 Worst Months are here. Regional bank woes persist, and the debt limit has not been resolved. We are officially neutral on the market and transitioning to a more cautious stance in the portfolios. When NASDAQ’s Seasonal Sell signal triggers, on or after June 1, we will consider additional defensive measures.
[Almanac Investor Stock Portfolio Table]
Disclosure note: Officers of Hirsch Holdings Inc hold a position in PR in personal accounts.