Last week was critical for the United States and the global financial markets. A week when the US government had to decide whether the country would default on its obligations or not.
The initial deadline was June 1st. Then the Treasury changed its mind and said that the deadline would be reached on June 5th, with a possible extension to June 15th (depending on the tax receipts for the period).
No matter the exact date, the government was running out of funds, and any delays in the decision would be brutal.
(We covered the possible consequences earlier.)
Luckily, both parties found common ground and suspended the $31.4 trillion debt ceiling until January 2025. But it doesn’t mean markets will get tons of liquidity injected in them as it happened during the pandemic.
In fact, one of the covenants of suspending the debt ceiling was capping government spending. Only in 2025 the government can boost budgets by 1%.
In other words, it’s one and a half years of no spending growth (at least in theory.)
But not all areas had the same treatment, and investors still have an opportunity even in this volatile market.
The trends we discuss here quite often have proven to be unstoppable, in other words.
What Did the Debt Ceiling Deal Change?
First, bad news.
The US government will reclaim $28 billion in unallocated COVID-19 funds. Students will have to resume repaying their loans after a prolonged pause during the pandemic.
The government wants to send a signal that it’s becoming more frugal. Hence, we don’t expect the Fed to release a tsunami of liquidity to the market but rather keep its tightening policy in place.
(After all, it’s not cheap to refinance any debt with interest rates as high as they are today.)
The good news is…
Some sectors will still get more funding. The defense sector will see a 3% increase. A climate and energy provision from the recent Inflation Reduction Act is also seeing funds allocated to it.
In other words, both parties agree that national security and green energy must remain well-funded.
Just a reminder that the Inflation Reduction Act is the latest bill with a multibillion budget for clean power generation and its distribution, electric vehicle subsidies, related infrastructure investments, and others.
We are unlikely to see the government reversing its policies towards these.
This aligns well with our initial bullish outlook on the “megatrends.” Infrastructure and green energy transition will get the funds no matter what.
It will be a bumpy road as recession odds remain high. But once the economy enters the recovery phase, the markets will likely rush into these sectors.
We believe the “megatrends” highlighted above will be the first ones on the list. But for now, it’s worth focusing on diversifying your portfolio to preserve your capital and manage risk.
Thank you for your loyal readership,
The Financial Star team
