Equities Endure Volatility – Domestic & International Stock Markets:     Uncertainty with the debt ceiling created volatility in domestic equities, yet still maintained positive year-to-date returns for the S&P 500 Index and the Nasdaq. The Dow Jones Industrial Average was still -0.72% for the year. Major international regional indices such as the MSCI EAFE, the MSCI Europe, the MSCI Pacific, and the MSCI Emerging Markets all maintained positive YTD results through the end of May- areas of the market where we’ve increased portfolio exposure in the proceeding quarters.

Debt Ceiling Issues Push Yields Higher – Fixed Income Overview:     Government bond yields saw an increase in May as discussions surrounding the debt ceiling transpired. Even with the turmoil in May, all bond sectors were still posting positive year-to-date results as of the end of May. The yield on the 10-year Treasury bond settled at 3.64%, rising slightly as possible increasing costs of borrowing for the government prompted concerns. Many areas of the bond market are now yielding 6-7% – providing us one of the most attractive investment we’ve seen in 15-20 years.  Our portfolio weighting to these areas of the market have increased since January 2, 2023.

Paper Check Fraud On The Rise – Consumer Awareness:     Despite electronic deposits and checks on the rise, paper checks remain an extremely common way to pay expenses such as rent, utilities, donations, and taxes. However, fraud is increasingly targeting paper checks, raising the risks of writing a check.

Such fraud can occur in a wide variety of ways, including the targeting of mailboxes where checks lay susceptible. Most of these tactics are low-tech and primarily target a more elderly population that still heavily relies on paper checks. Americans sent out 11.2 billion checks in 2021 alone. Banks are reporting that check fraud has been rising significantly, with credit card fraud the next highest form of fraud.  Certain methods could prevent check fraud. For one, individuals and businesses should limit the number of written checks to reduce the chances of a check being stolen. Experts recommend using gel ink pens rather than ballpoint pens to make it more difficult to remove the ink with chemicals. Additionally, always keep an eye on any unusual transactions and report them as soon as possible to your bank. The fraud has nothing to do with the scammers having your account number, but rather, they erase the payee information on the check and replace it with an illegitimate company or individual’s name.

Recent History of the Debt Ceiling – Fiscal Policy:     In the decades following World War II, the U.S. has seen its debt level steadily increase as the government has faced growing financial commitments. More recently, however, government debt has been expanding at a more significant pace since the early 2000s. Through these past two decades, there have been several political disputes regarding the debt ceiling, which is the limit of debt the government can issue. In January, the debt ceiling of $31.4 trillion was surpassed, which prompted the U.S. Treasury to implement “extraordinary measures” that will last until early summer to avoid the government defaulting on debt.

There have been several debt ceiling hurdles since the turn of the 20th century. Fortunately, the U.S. has never defaulted on its debt, which means the Treasury would be unable to pay its obligations. However, 2011 saw a point of near default, leading to credit rating agencies’ first downgrade of U.S. debt. In 2013, debates regarding the debt ceiling rose again, with the government experiencing a partial shutdown that led to the furloughing of hundreds of thousands of federal employees until the debt ceiling was suspended.

More recently, another government shutdown occurred in 2018 when the debt ceiling yet again failed to be raised. Now, in 2023, the debt ceiling saw a near-default due to political gridlock and differing interests by the main political parties. The resolution to this will delay further debt negotiations until 2025, suspending the debt ceiling and keeping spending largely at its current level. The risks of default include severe domestic and global economic repercussions, market volatility, and damage to confidence in the U.S. government’s ability to manage its finances. As political gridlock has driven another debt ceiling crisis, it is important to note that extremely similar circumstances have occurred in the past and will likely continue to occur.

It’s important to understand that raising the debt ceiling has absolutely nothing to do with increasing future government spending – something the media and politicians willfully attempt to confuse people about.  Rather, it’s about raising the current debt threshold to pay for past obligations and previous commitments.  It’s the future obligations that need to be examined, scrutinized and reduced – not politicians threatening to renege on our nation’s past financial pledges.