Strong Earnings And A Positive Outlook Boost Another Homebuilder's Stock

This year, “Sell in May” could turn out to be more than just a cliché. As a result of yet another fight over raising the federal debt ceiling, there is a possibility that the summer of discontent for the markets will be a summer of discontent. In reality, however, a possible market meltdown may be exactly what is required to bring the White House and Congress together to reach an agreement to prevent the first default on the US's full faith and credit.

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According to Evercore ISI's equity and derivatives strategy team, led by Julian Emanuel, politicians have been aware that the best path to raising the debt ceiling lies on the market's floor. As a matter of fact, as a result of the debt-ceiling fight that occurred in 2011, and which resulted in Standard & Poor's downgrading the U.S. from their top triple-rating, the market soared in volatility and ultimately plunged by nearly 19%.

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As a matter of fact, it doesn't look like President Joe Biden and House Speaker Kevin McCarthy (R., Calif.) are going to make a Thelma and Louise-style drive into the abyss of default. Even though a recent vote in the House of Representatives that raised the debt ceiling was dead on arrival in the Senate, it reduced the chances of Uncle Sam passing the so-called X-date, when he runs out of money management tricks for the next few years.

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It was originally planned to be implemented by Treasury Secretary Janet Yellen in early June, but as a result of an unexpected increase in old-fashioned paper checks sent by taxpayers as of Tuesday, it may be staved off until as late as August, according to a note written by Alec Phillips of Goldman Sachs. There is a 75% probability that a debt-ceiling agreement will not be reached until at least two weeks before the ultimate X-date, according to Strategas Washington's policy analysis team led by Dan Clifton, and a 65% probability that it will reach the final week of negotiations.

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A lengthy debate over the debt limit is likely to result, especially in the case of stocks, because anxiety is likely to rise ever more as a result of the ongoing battle over the debt limit. U.S. Treasury bills are supposed to be the most secure investments on the planet, but already there are fears that the market will default. It is well known that yields on the shortest T-bills that are maturing before an X-date are in high demand, as our colleague Andrew Bary wrote one week ago. It appears that investors accepted a yield of 4.17% on a one-month bill Thursday, nearly a full percentage point lower than the three-month bill, in exchange for the assurance that even the most unlikely default would be avoided. Although the X-date has apparently been pushed off by one month, that number has increased from a low of just 3.35% on April 21.

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Also, Evercore's Emanuel team writes in a client note that the cost of buying credit default swaps to cover a U.S. government default has skyrocketed well before the likely X-date even occurred, indicating that the price is increasing far sooner than anticipated. In contrast, stock markets have been trading sideways for roughly six months, just as they did before the 2011 debt-ceiling crisis.

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In accordance with the Evercore team's analysis, it appears that the S&P 500 is caught between recessionary signals from the leading economic indicators and the M2 money supply. Even though the M2 money supply is receding from its high, it is still approximately $5 trillion above its pre-Covid trend line, indicating that there is still a lot of room for improvement. It is the debt ceiling dispute that is most likely to break the deadlock.

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“Just as it was in 2011 when stocks awoke from their slumber, equity market volatility (a stock market selloff) will resolve the impasse as well,” they add. In their opinion, nothing seems to focus the minds of Congress more than a chaotic Wall Street. As soon as the House voted down the Troubled Asset Relief Program in 2008, when was in the midst of the 2008-09 financial crisis, the S&P 500 plunged by 8.8% that same day. As a result, enough minds were changed by that plunge for Congress to pass TARP later.

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There is no doubt that the S&P 500 will drop back to 3800 on Thursday, a retracement of about 8% from its close, according to Eliahuel and his team. Although that would be less than half the 18.8% decline from July 7 to October 3, 2011, it would still be above the recent low of 3577.03 on Oct. 12, 2022, so it would still remain above that level.

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As Jeffrey Hirsch, editor-in-chief of the Stock Trader's Almanac, pointed out, seasonal patterns also favor a defensive approach to investing. In a client note, he writes that the sweet spot between the [fourth-quarter] midterm and [second-quarter] preelection year seems to have hit a sour patch, a turning point in the four-year [political] cycle.

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It appears that the S&P 500 is taking the same path as it did before the 2011 debt ceiling showdown, which pitted a Republican-led Congress against a Democratic-led White House in the most contentious election in four years. In addition, Hirsch’s data suggests that the market is ending the best period in the remainder of the four-year election cycles.

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His advice to his followers this past Tuesday was based on that and other technical indicators, recommending that they sell their SPDR S&P 500SPY +0.85% exchange-traded fund (stock ticker SPY) and SPDR Dow Jones Industrial AverageDIA +0.84% exchange-traded fund (stock ticker DIA). His advice to them was to keep their hands on Invesco QQQQQQ +0.69% (QQQ) -the ETF that tracks the Nasdaq 100 mega-caps, which got a major boost after earnings, due to large gains in Microsoft MSFT +0.80% (MSFT) and Meta Platforms META +0.74% (META) stocks.

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Hirsch points out that he's not advocating that you sell your house in May and go away, but he does say that now would be a good time to begin to take a more neutral stance and prepare to deal with what he calls the worst six months of the year.

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The Evercore team points out that, since 1950, the stock market has never bottomed before the beginning of a recession—and never without a "cathartic volatility spike." This may seem like the most anticipated recession in the history of the world, but this time around, they counter another market by saying, "This time around, it's not different."

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Evercore is predicting that the major indexes could have a painful return to their October 2022 lows in the second half of 2023 which could serve as the bear market finale. According to them, the good news is that it could be the beginning of a multiyear bull market for buyers and sellers alike. However, from May to December, according to the immortal Kurt Weill song, it seems to be a long, long time.

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