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Potholes vs. Black Holes

While there are legitimate headwinds to markets and the broader economy today should investors be viewing these risks as potholes or black holes along their investment journey? We breakdown some helpful history to gain perspective.


  1. Equity Markets – fell this week with U.S. stocks (S&P 500) down -0.25% while international stocks (EAFE) fell -0.99%

  2. Fixed Income Markets – were also lower this week with investment grade bonds (AGG) down -0.24% while high yield bonds (JNK) fell -0.34%

  3. Debt Ceiling Debate The saga over a resolution to the debt-limit continued without much progress this week as President Biden said that the White House will only accept a “clean” no-strings-attached debt limit increase. The President and House Speaker Kevin McCarthy were set to meet today but was postponed, leaving their aides to continue negotiations. The conversation will only continue to intensify as we approach June 1st without a resolution in place.

  4. U.S. Engages Chinathe current administration reiterated their commitment to engaging in talks with China in hopes of easing tensions and applying pressure on President Xi to respond. The U.S. is also urging a 1 on 1 conversation between the two nation’s president, something that has been pushed for months. China’s immediate reaction came with skepticism stating “the key is that the US cannot stress the importance of communication while keeping up suppression and containment against China.”

  5. Key Insight – [VIDEO & ARTICLE] While there are legitimate headwinds to markets and the broader economy today should investors be viewing these risks as potholes or black holes along their investment journey? We breakdown some helpful history to gain perspective.


The Debt Ceiling

Whether it’s the media in general or the uptick in recent client conversations there is no doubt that the current debate in Washington around whether to raise the debt ceiling has gripped people’s attention and stoked a number of fears for investors.

Analyst Tom Essaye created a nice summary of the situation we wanted to share, stating “What Happens if there’s no debt ceiling deal? First, there is an important difference between hitting the debt ceiling and the U.S. defaulting. Practically speaking, the debt ceiling prevents the Treasury department from selling additional Treasury debt. That’s a problem, because regular sales of Treasuries are how the U.S. government funds its day-to-day operations. However, if the debt ceiling is hit and the Treasury department can’t sell additional Treasuries, it does not mean the U.S. is bankrupt or in default. What it does mean, is that the Treasury department then has to “ration” its existing cash and decide who to pay, and who not to pay. So, Treasury could pay interest on existing Treasury debt, soldiers’ salaries, social security, and not pay federal workers’ salaries and federal contractors (this is just a theoretical example). The important point is this: Hitting the debt ceiling doesn’t mean the U.S. automatically defaults on its debt. But it does mean it’ll have to direct cash to essential services and payments and not pay “less essential” services. This matters because it’d create a huge headwind for economic growth and make a hard landing more likely.

First, the general uncertainty of the Treasury restricting payments would be a headwind on eco- nomic activity.

Second, the delay of a paycheck from the Federal government to workers, contractors, etc., would cause an even bigger headwind on economic growth. This is the practical negative for the U.S. hitting the debt ceiling, and it would be more than just general uncertainty weighing on the economy.

He continued by dispelling some concerns stating “Essentially, investors are looking at this event as a finite moment in time, almost like a pothole in the road. Yes, if we hit the pothole, it can cause some damage and dis- comfort, but it won’t derail the entire journey.”

As we’ll touch on a bit more below, an investor need not fear such unknowns as though they are black holes if they’ll take some simple steps and keep perspective.

What about that Recession?

Whether the solidly inverted yield curve, the Fed’s history of overtightening or a myriad of economic indicators that continue to slow meaningfully, evidence continues to grow that the economy is headed for, if not already in, a recession.

The folks at Bespoke addressed the latest data of choice for arguing that a recession is upon us, jobless claims, but stop short of any type of declaration.

They noted, “While the trend of claims over the last year is similar to the pattern leading up to prior recessions, it would be incomplete to conclude just from this that a recession is imminent. To get a more definitive picture, we looked for other periods that followed a similar pattern outside of recessions. The chart below shows initial jobless claims since 1968, with red dots indicating each prior reading where initial claims were 75K or more above a 52-week low with no other occurrences in the trialing six months.

Looking at it from this perspective, the argument for a recession looks less persuasive. While initial claims had similar surges leading up to prior recessions, these types of spikes were even more prevalent outside of recessions. In just the post-Financial Crisis period, there were three separate periods where claims registered a reading of 75K+ above a 52-week low without a recession being on the horizon, and for each one of the 23 prior occurrences, a recession within the next six months followed just 30% of the time. In other words, just because claims may be quacking like a recession, doesn't necessarily mean a recession is a done deal. The key factor to watch is the persistence of elevated claims. With each additional week that claims come in more than 75K above a 52-week low, the odds of a recession incrementally increase.”

Overcoming “Potholes”

What makes market “potholes” seem like “black holes” is not the actual danger associated with them, but rather many investors’ misplaced (depth) perception based on a lack of perspective or understanding.

Volatility, aka bumps in the road, are an inevitable part of the journey for any investor. The danger is not the bumps but trying to time markets and consequently abandoning one’s plan aka “pulling off the road.” As you can see from the following chart, missing just a few good days radically reduces your likely returns, and equally noteworthy is that those days tend to occur right when markets are at their scariest.

What “fuels” you through such periods is sufficient income and liquidity to meet your needs of today, and the diversification to weather the associated emotional aspects of tough markets through diversification.

Looking at the info from AMG below you’ll see that a diversified portfolio can offer very similar long-term returns with far less volatility. And while you can’t model it, my anecdotal experience tells me the likelihood of actually achieving those returns are much higher as one’s chances of staying invested are much higher with less volatility than an all-equity approach.

AMG’s work found that “Looking at the total return of a diversified portfolio and the S&P 500 over the last 23 years, this chart illustrates that a diversified portfolio provides similar returns to the S&P, but with about two-thirds the volatility. Historically, a diversified portfolio has also recovered faster from losses.

It demonstrates that:

  • After the tech bubble bear market drawdown (3/25/00 – 10/9/02), the diversified portfolio recovered in 8 months versus 49 for the S&P
  • After the GFC bear market drawdown (10/10/07-3/9/09), the diversified portfolio recovered in 13 months versus 37 for the S&P”


There are always things to fear as an investor, but there is also always a path through. While at times uncomfortable do not let a lack of planning, your emotions or the media’s hyperbole make black holes out of potholes.

As always, we are here to take that journey with you and be of help anytime.

Have a wonderful sunny weekend,

Tim and the team at TEN Capital


Data points this week included:

  • U.S. Jobless Claims – initial claims saw an unexpected increase last week of 22,000 to 264,000, the highest on record since October 2021. Continuing claims also saw an increase to 1.813 million.

  • U.S. Consumer Sentiment – saw a sharp decline in May to a 6-month low of 57.7. The expectations component fell to 53.4 from 60.5 while the current conditions index fell to 64.5 from 68.2.

  • Germany Industrial Production – fell 3.4% in March from the month prior and below expectations for a 1.3% decline. For Q1 of 2023, production was 2.5% higher than the same period in 2022.

  • U.K. GDP – as expected finished the first quarter with an expansion of just 0.1%. The services and manufacturing sectors saw growth while education and health declined. The region’s economy still remains 0.5% below its pre-coronavirus levels.
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