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There is More Than One Ceiling

The debt ceiling is dominating today’s headlines.  House Speak McCarthy has gone on record saying that the limit on the government’s borrowing must be raised this week to avert a default.

This is not the only ceiling that is preoccupying the markets.  There are many headlines discussing the 4,200 ceiling on the S & P 500.

In the short term, markets are about waves of psychology and confidence where certain landmarks become self-fulling prophecies. Yes, the S & P 500 has been higher than this level but not since August 2022.  It has broached this level several times since but has not closed above this psychological barrier.

A number is only a number therefore the level 4,200 should not matter but today’s trading is dominated by technology-based algorithms [90% of volume as per the SEC] where headlines and momentum are a primary determinant, a number thus becomes perhaps even more significant.

Many are spooked by the near narrowness of 2023’s rally.  It is not unusual for a few big stocks to dominate at any one time, but the 2023’s growth of FAANG is truly phenomenal.  Bloomberg writes the largest ten S & P 500 stocks are up 24.5% YTD.  The five largest stocks have gained an average 39.4% YTD.

Breakouts or breakdowns can have a big impact on market psychology.  If several of the mega sized companies struggle volatility may greatly increase given their total domination of 2023 market performance.

Commenting on yesterday’s market activity, equities and short dated Treasuries fell as negotiations over the debt ceiling remained at an impasse.  How ugly will it get before a compromise is reached?

Almost all are complacent a compromise will be reached thus suggesting if an impasse does remain, the possible outcome might be accentuated, defined as the decline may be considerably more severe than it might otherwise have been.

The Minutes of the recent Fed meeting are released today.  Will the release be overshadowed by the current debate?

Last night the foreign markets were down.   London was down 1.82%, Paris down 1.86% and Frankfurt down 1.72%.  China was down 1.28%, Japan down 0.89% and Hang Seng down 1.62%. Futures are down about 0.25% as angst is beginning to build about the debt ceiling. Oil is up another 2% as Saudi Arabia warns speculators not to short oil, perhaps a precursor to another unexpected production cut.   The 10-year is up 3/32 to yield 3.69%.

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Kent Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.