- Bank of England leaves monetary policy unchanged
- S&P 500 and DJIA post gains of 1.3% and 1.1%, respectively
- U.S. inflation and housing data and euro area GDP headline this week’s economic releases
After a short-term extension, the federal debt limit is set to take effect this coming weekend. That being said, U.S. Treasury Secretary Jack Lew stated on Friday that the federal government will be able to fund itself until Labor Day thanks to incoming cash flows. While Lew also said that the debt ceiling should be dealt with right away, Congress is not expected to address the situation until later this fall, likely coinciding with the start of the next fiscal year in October. Once that time comes due, we expect a very heated and partisan debate as Republicans will once again push for spending cuts in exchange for another increase to the debt ceiling.
Policy Status Quo
In the meantime, we expect to see very few policy developments emerge from Washington. The budget sequestration is likely to remain in place through the remainder of this fiscal year and although both parties have expressed an interest in achieving a comprehensive budget agreement and tax reform, we do not expect either to come to fruition for the time being. Under such a scenario, the credit rating agencies will likely take a fresh look at the United States and downgrades are a very real possibility.
Market Implications
The good news for investors is policy developments in Washington are unlikely to disrupt the positive momentum in the equity markets at least until later this year. With respect to the ongoing rally, we remain constructive on the forward outlook for equities and believe the economic data here in the United States will improve over the next several months. Confirming this viewpoint has been the continued outperformance by the more cyclical areas of the market—last week, the Industrials and Materials sectors were up 2.4% and 1.9%, respectively. This may mark the beginning of a sector rotation, which could hinder the performance of defensive sectors such as Utilities, Health Care and Consumer Staples, which have all enjoyed strong performance to begin the year and are trading at much richer valuations compared to their long-term averages and cyclical counterparts.
Data Source: FactSet and RIMES
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