The US debt has surpassed $30 trillion for the first time in February, prompting Congress to consider raising the debt limit, which is the maximum amount the Treasury can borrow to pay America’s bills. $7 trillion were added to the national debt due to the coronavirus pandemic in the last two years alone.

Increasing the debt ceiling allows the Treasury to borrow funds to pay for government obligations that have already been incurred as the result of laws and budgets approved by the President and the Congress. On May 1st, Janet Yellen warned that the United States may run funds by June 1st, which means another increase is likely on its way. What can investors expect as we approach this date?

(Global X)

In the summer of 2011 and fall of 2013, we experienced the same debt ceiling issues. The chart above illustrates the performance of sectors in the market for the month leading up to the previous agreements. While there is somewhat of a mixed bag of results, the consistent theme is that debt securities (treasuries and the US Bond Market) were positive in both cases which is a typical trade to safety when there are uncertainty fears growing in the market. While past performance is not indicative of future results, we will continue to use history as a guide for what to expect in the coming weeks.

Investor Sentiment

The % Bull-Bear Spread is a measure of US investor sentiment that is calculated by subtracting the percentage of bearish investors from the percentage of bullish investors. This metric is closely watched by many market participants, as it provides insight into the prevailing mood among investors and their outlook for the stock market.

When the % Bull-Bear Spread is positive, it indicates that there are more bullish investors than bearish investors, which suggests that investors are generally optimistic about the future direction of the market. Conversely, when the % Bull-Bear Spread is negative, it indicates that there are more bearish investors than bullish investors, which suggests that investors are generally pessimistic about the future direction of the market. The long-term average of this indicator is 6.44%.

With the recent market rally, we have seen this indicator tick up a bit from the March lows, but it still remains in a firmly bearish sentiment. According to data from the American Association of Individual Investors (AAII), the % Bull-Bear Spread has historically been a reliable indicator of market sentiment. For example, during periods of extreme bullishness, when the % Bull-Bear Spread is well above its long-term average, the market has often experienced a correction or pullback. Similarly, during periods of extreme bearishness, when the % Bull-Bear Spread is well below its long-term average, the market has often experienced a rally or rebound.

Student Loan Forgiveness

The Supreme Court has heard the arguments in the case of the federal student loan forgiveness program in February, but no decision has been reached. The Supreme Court generally releases most of its opinions by the end of June so we are likely in the final stretch before a decision has been made.

Once a decision is reached, student loans are expected to begin 60 days after the ruling is in place which means August could see a resumption of these payments.

(Education Data Initiative)

The meteoric rise in student loan debt has reached $1.76 trillion as of April 2023. It has stalled out for the last 3 years as payments were suspended, but this number will begin to increase again once a resolution has been made. People with student loan debt awaiting a decision should begin the planning process of how to handle those debt payments once they resume. With payments resuming, we will keep a close eye on how this impacts consumer spending in the months after these costs begin again.

News at Lake Street

We are proud to announce that Lake Street has been named one of the Best Financial Advisory Firms of 2023 by USA Today. One of the criteria was based on peer recommendations from other financial advisors. This recognition is a true testament to the culture we are building and our unwavering dedication to providing exceptional service to our clients. We want to take this opportunity to congratulate the entire Lake Street team for their hard work and commitment that led to this outstanding achievement. Well done!

Top financial advisors according to USA Today and Statista: (USA Today’s Best Financial Advisory Firm of 2023)

Articles We’re Reading

Big Tech shares rally just as hedge funds unwind half of YTD purchases (Bloomberg)

Cloud providers AWS, Azure, Google Cloud face spending cuts by clients (CNBC)

Series I savings bond rate falls to 4.3%, down from 6.89% after last reset (Bloomberg)

FDIC recommends raising deposit insurance coverage to reduce risk of bank runs (FT)

Market Snapshot

For the Month Ending 4/30/2023 (Cumulative Returns)1

1Source – Morningstar, Inc. Corporate Bonds is presented as the iShares iBoxx $ Investment Grade Corporate Bond ETF. Municipal Bonds is presented as the iShares National Municipal Bond ETF. High Yield Bonds is presented as the iShares iBoxx $ High Yield Corporate Bond ETF. 10 Year Treasury refers to the valuation of a 10 Year Treasury Note, a debt obligation issued by the U.S. Department of the Treasury. Fed Funds Target represents upper limit of the federal funds target range established by the Federal Open Market Committee. Inflation Rate provided for the purposes of this report by the U.S. Bureau of Labor Statistics. Unemployment Rate calculated by the U.S. Bureau of Labor Statistics. WTI Crude Oil refers to the price of a barrel of West Texas Intermediate NYMEX) Crude Oil. Gold – Spot Price relates to the valuation of an ounce of gold, as traded on the NYSE Arca Exchange. U.S. Dollar refers to the U.S. Dollar Index (DXY). All Returns are denominated in USD (United States Dollar), unless otherwise explicitly noted.

Did You Know?

On May 17, 1792, twenty-four stockbrokers gathered under a buttonwood tree on Wall Street in New York City to sign what became known as the Buttonwood Agreement. This agreement established rules for trading securities and formed the basis of the New York Stock Exchange (NYSE).

However, just a few months after the NYSE was established, it experienced its first major crisis. In May 1792, speculation in government securities led to a bubble in the market, with prices soaring to unsustainable levels. The bubble burst on May 11, 1792, and panic selling ensued, with prices dropping sharply and many investors losing their life savings.

The panic of 1792 was a wake-up call for the young United States and its fledgling financial system. It highlighted the need for regulations and safeguards to prevent market manipulation and protect investors. In response, Congress passed the Buttonwood Agreement into law, and the federal government established the Office of the Comptroller of the Currency to oversee banks and financial institutions.

The lessons of the first stock market crash in the United States still resonate today. They remind us of the importance of transparency, accountability, and responsible financial practices, and the need to balance innovation and growth with stability and resilience.

Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.