Expect more volatility in the stock market as the June 1 debt ceiling deadline gets closer.
Some S&P 500 sectors perform relatively well leading up to resolutions, Morgan Stanley says.
Energy has been as a top performer before lawmakers reach a deal.
The risks of the stock market seeing the US slide into a debt default are uncomfortably high, but pockets of the market historically perform relatively well as lawmakers wrangle over the country’s borrowing limit, according to Morgan Stanley.
The 1996, 2011, and 2013 negotiations around the debt ceiling offer a partial comparison to the current situation, Morgan Stanley’s US equity strategy team led by Michael Wilson said in a note published Monday. A June 1 deadline to raise the $31 trillion limit is approaching, and the nonpartisan Congressional Budget Office sees the US running out of money to pay its bills in early June.
20 stocks expected to outperform the market, including one by 2,637%, according to a fintech company that tracks Wall Street’s top analysts’ price targets
2. ARC Resources
3. Compass Therapeutics
5. Protagonist Therapeutics
6. Aldeyra Therapeutics
7. Cabaletta Bio
8. Chinook Therapeutics (Aduro)
9. Genius Sports Limited
10. Biomea Fusion
13. CymaBay Therapeutics
14. Viking Therapeutics
15. Hannon Armstrong
16. Delta Air Lines
17. Northern Oil & Gas
19. Tourmaline Oil
20. H & E Equipment
“Most [clients] believe it will ultimately get resolved but not without some near-term volatility,” Wilson wrote.
Diving into S&P 500, the firm found the energy and utilities sectors were the top relative performers heading into a resolution. The energy group in three and two months before deals were reached posted returns of 4% and 6%, respectively, returning 3% in the month before a deal.
In that same time frame, utilities, a defensive sector, posted returns of 3% each, followed by 2% one month before lawmakers cemented an agreement.
After Washington pushes past a stalemate, the tech, healthcare, staples, and dividend growth groups perform well. Tech’s return was 13% one month following a deal, while healthcare returned 7% and staples returned 3%.
“Interestingly, real assets saw a distinct shift in performance pre- and post-resolution,” said Wilson. The team found energy and commodities — stripping out gold — had positive absolute returns into the debt-ceiling debates then swung into negative territory after lawmakers settled their differences.
For energy, negative returns were 3% and 6% in the first and second months post-resolutions.
Stocks overall sold off both into resolutions and lost another 12% in the two months following deals, Morgan Stanley said. “All this is to say that markets were flat on average near debt ceiling resolutions, but in reality, the comps saw some near-term volatility followed by a continuation of the previous trend,” said Wilson.
House Speaker Kevin McCarthy on Monday said he’s “far apart” from President Joe Biden in reaching a deal, under which Republicans are seeking spending cuts.