The Debt Ceiling Could Be a Mess. How to Play It.

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The debt-ceiling standoff between the GOP House and the Biden administration will likely cast a long shadow over markets. President Joe Biden met with House Speaker Kevin McCarthy and other congressional leaders this past week, but their talks ended without a resolution, and a Friday meeting was postponed as staffs met.

If you’re a long-term investor, there’s a strong case to do nothing. If history is a guide, a deal to avoid a default will be struck. Adam Turnquist, chief technical strategist at LPL Financial, says that, if there is a prolonged battle similar to 2011’s, watch for large-caps to outperform small-caps, growth to top value, and defensive sectors to outpace more cyclical ones.

Defensive sectors include utilities, which in 2011 only fell 0.8% from the April high to October low. The next-best sector in 2011 was consumer staples, off 6.9%. The S&P 500 was off some 19.4% during that contentious stretch in 201l. Large-caps fell 18.3%; value, 22.3%; and small-caps, 29.6%.

Treasuries are the ultimate haven. But a fight over U.S. debt puts them in the eye of this storm. In the near term, Michael Rosen, chief investment officer at Angeles Investments, says investors have an opportunity to pick up higher-yielding short-term Treasury bills. Four-week T- bills maturing May 30 yield 4.33%, while those maturing June 1 yield 5.12%, he notes.

The market is assuming that “when the calendar flips to June 1, that bill may not get paid on time,” Rosen says. “I’d rather own that June 1 bill than the May 30 bill and pick up that nice yield.”

Write to Lauren Foster at [email protected]

Last Week

Banking Fallout

Regional banks began the week higher as PacWest cut its dividend, but the Federal Reserve went on to warn of a bank credit crunch, and debt-ceiling talks went nowhere. The Nasdaq Composite exited the bear market that began in October, though stocks fell broadly early in the week, dropping more after April inflation edged down, jobless claims rose, and PacWest reported losing more deposits. On the week, the Dow industrials lost 1.11%, to 33,300.62; the S&P 500 slipped 0.29%, to 4124.12; and the bullish Nasdaq rose 0.40%, to 12,284.74.

The Earnings Beat

KKR

posted a 26% drop in earnings, but beat expectations.

PayPal

beat, but the stock sagged as active users slipped.

Airbnb

shares fell after it beat expectations but warned about average daily rates.

Occidental Petroleum

missed big on profits—down 48%—and revenue, the third miss in four quarters.

Walt Disney

surprised investors with a serious drop in streaming subscribers. Shares followed.

Talking Default

President Joe Biden and congressional leaders met at the White House to try to resolve the debt-default deadline. Treasury Secretary Janet Yellen had earlier said the government could run out of money on June 1. She began lobbying business and financial leaders. After the meeting, Biden said that he was cheered by a promise from Senate Minority Leader Mitch McConnell that the U.S. “is not going to default.” Lower-level talks then began.

In Search of Victory

Russia celebrated a scaled-down Victory Day over Nazi Germany. Russian forces began evacuating Ukrainians from around the nuclear plant at Zaporizhzhia. Wagner Group leader Yevgeny Prigozhin changed his mind about withdrawing from Bakhmut after Russian military agreed to provide more support, and as Ukraine made gains there. Ukraine President Volodymyr Zelensky said the counteroffensive would wait for the delivery of more Western weaponry.

Trump Liable

A jury in a New York case said that former President Donald Trump was liable for sexual abuse and defamation. His accuser, former advice columnist E. Jean Carroll, was awarded $5 million in damages. Trump says he will appeal. The same day, the Department of Justice indicted Republican House member George Santos on 13 charges of fraud, theft of public funds, and money laundering. Santos confessed to theft in Brazil, settling a decade-old case. He’ll pay restitution and fines.

Annals of Deal Making

CEO Warren Buffett said at the

Berkshire Hathaway

annual meeting that the company wouldn’t make an offer for full control of Occidental Petroleum. He didn’t rule out buying more shares…Money-laundering concerns at

Toronto-Dominion Bank

led to regulators rejecting TD’s $13.4 billion takeover of First Horizon…

Icahn Enterprises

said that federal prosecutors contacted the company after Hindenburg Research’s critical report…Elon Musk hired NBCUniversal’s ad chief Linda Yaccarino as CEO of Twitter. Musk will remain as chief technology officer.

Tesla

stock rose on the news.