US is running a clinic on how to self-inflict financial wounds

Earlier today I was on a conference call with traders examining the index price patterns and discussing the initial price action of The SP500 (INDEXSP: .INX) and the Nasdaq (INDEXNASDAQ: .IXIC) off their July highs. Currently my company is forecasting we revisit, and ultimately breach the October 2022 lows sometime in the first half of 2024. However, what the catalysts are to get us there is speculation. A black swan event of such some stature would need to unfold.

Mid conference call one of the attendees’ types into the zoom chat box, "McCarthy was just removed as speaker!" On the call was a collective...whoa!

I could understand some of you reading this article would say, so what! The US congress has been dysfunctional for some time now. Unfortunately, I would agree and could not find fault with such apathy.  However, consider the unintended consequences of such a historic action. Never has a US speaker of the house been removed in such fashion.

What could develop into unintended consequences? 

Which such acrimony and division in the lower chamber how can the house agree on anything? The hill conservatives in the house want to die on is the growing national debt. Whether that is disingenuous or not is not the point of this article. I'll let the political pundits argue that. I want to keep this article focused on what is directly related to the US markets.

Government Funding

Through some rare bipartisanship we averted a government shut down just this past weekend.  Leading up to this weekend, the news media had all but written the obituary for a funded government through regular order.  However, the legislation only funded the government for 47 days. That means it's possible we're back to worrying about a funded US government next month.

Rating Agencies

I have to admit when Fitch downgraded the credit rating of US government debt in August, I was skeptical of that decision. In retrospect, I now understand with all the self-inflicted uncertainty. However, do we need to now worry about Moodys and Standard & Poors.  What is the consequence to interest rates if the US credit rating becomes under assault.  

Interest Rates

The US markets have yet to acknowledge high interest rates are a structural headwind for company earnings and by extension, the market as a whole.  Case in point, the below chart shows the yield on the 10y treasury.

10-year US Treasury Chart

Today, yields are higher than when at the October 2022 lows.  The uncertainty created today by historically removing a US speaker of the house does not scream the US should be getting a lower rate on it’s debt. No, it most certainly means the opposite.

Mortgage Rates

12% of US GDP is housing. Aside from Fed action, if rates now go up because of the added uncertainty, we could easily go from positive to negative GDP.  No US sector is more rate sensitive than housing.

Consumer Spending

If you thought housing at 12% of GDP was large, the consumer represents 70%.  From mortgages, to credit card debt, the consumer was already starting to slow. Higher rates due to uncertainty will cause the consumer recoil, and that's the ballgame.

I could go on about current labor strikes in America and how that could change the employment outlook and the economy on a dime.  I could discuss in depth the quantitative tightening action of the federal reserve.  All concerns we're currently trying to weigh its impact on the economy.

Now we have to deal with this new added uncertainty. It appears in the US we know how to run a clinic on self-inflicted wounds.