Global Courant 2023-05-16 05:52:23
The 2011 debt ceiling debate was a useful, if not ominous, analogy as Wall Street grapples with Washington’s current back and forth over raising the country’s borrowing limit. Concerns about a possible U.S. government bankruptcy have only increased in recent days, contributing to consecutive weekly losses in the S&P 500. If a scenario like 2011 played out in the market this year, it would certainly be troubling . But then a deal was finally struck at the last minute and in many cases the weakness of the debt ceiling in equities turned out to be a great buying opportunity for investors willing to jump in. So, with history as our guide, we wanted to take a closer look at how our current Club positions fared in 2011. But first, some background: The S&P 500 had a solid first half of 2011 — up about 7% through the end of July — before being derailed by debt-ceiling drama. The broad US stock index plummeted nearly 17% in a few weeks that began in late July and bottomed out in mid-August. In early August, the Democrats and Republicans finally reached an agreement. In the days that followed, however, markets were rocked when Standard & Poor’s made the unprecedented decision to downgrade the United States’ highest AAA rating. The whole saga took the S&P 500 from 1,345.02 on July 22, 2011 to a low of 1,123.53 on August 19, 2011 — a 16.5% drop to be exact. But from then on, a strong 12% rally would take place, leaving the index virtually flat for the whole of 2011. On February 7, 2012, the S&P 500 closed above its late-July high. . Zoom out further: From the bottom of August 19, 2011 through last Friday’s close — May 12, 2023 — the price of the S&P 500 has more than tripled. That’s more evidence in favor of betting the markets long term, no matter how bleak a particular situation or pullback seems in real time. .SPX mountain 2011-08-19 S&P 500 from Aug 19, 2011 to present It is impossible to predict exactly how negotiations in Washington will play out in the coming days and weeks. But there is a sense of urgency as Treasury Secretary Janet Yellen has said the US may run out of ways to meet its borrowing obligations by June 1. President Joe Biden struck an optimistic tone on Sunday ahead of Tuesday’s meeting with the top four leaders. Republicans, who control the House of Representatives, have demanded cuts in federal spending to reach agreement on raising the debt limit. Democrats, who control the White House and Senate, have argued that the US should continue to pay its bills without any other conditions attached. Jim Cramer has urged investors to take a more cautious short-term stance as the parties work things out. Accordingly, the Club has reduced its cash position to approximately 10%. This gives us the dry powder we need to be buyers of any future debt ceiling weakness in our favorite stocks. If 2011 is any guideline, we expect opportunities this time too. In fact, the market is already close to entering oversold territory, based on the S&P 500 Short Range Oscillator, which usually prompts us to look for bargains. Here’s a table detailing how our Club stocks performed during the heated debt ceiling debate in 2011 and how they fared for the rest of the year after the crisis passed. Note: The above information excludes Meta Platforms (META) and Palo Alto Networks (PANW) as these two Club holding companies were not publicly traded in 2011. Meta, formerly known as Facebook, and Palo Alto Networks both completed their IPOs in 2012. In addition, Coterra Energy (CTRA) was known as Cabot Oil & Gas in 2011 and traded under the ticker COG. In October 2021, Cabot merged with Cimarex Energy to form Coterra and changed the stock symbol to CTRA. No Club stock survived the debt ceiling drama of 2011 unscathed, but it comes as no surprise that Procter & Gamble (PG) and Johnson & Johnson (JNJ) had the best relative performances, falling just 5.1% and 5 .4%, respectively, between July 22 and August 19, 2011. Both companies are classic defensive moves. When stock investors are concerned about a catastrophic financial event, such as the default of the US government, they look to the perceived safety of consumer staples and healthcare companies such as P&G and J&J. A similar rationale appears to explain why TJX Companies (TJX) had the third-best relative performance, falling just 5.9% during the debt ceiling jitters of 2011. The off-price retailer is seen by many as a defensive stock as consumers under pressure through a slowing economy, or even a recession, increasingly look for the bargains that can be found at TJ Maxx, Marshalls, and Home Goods. TJX also had a great rest of the year, gaining 22% from the August 2011 low of the S&P 500 index to year-end. This time, the Club certainly expects defensively oriented stocks to hold up better than the overall market if a solution is not forthcoming. “Don’t take action unless you buy a stock that will do well in a recession, because that’s what Wall Street will assume we’ll be entering if this battle continues,” Jim said last week. Many of the worst-performing Club stocks during the 2011 debt battle are the types of companies typically hit by a slowing economy, such as oilfield service provider Halliburton (HAL) and financial Morgan Stanley (MS). Those stocks each lost a third of their value between July 22 and August 19, 2011. Pioneer Natural Resources (PXD), another energy stock, and industrial companies such as Honeywell (HON) and Caterpillar (CAT) were also among the biggest underperformers during that period . Similar to the outperformance of P&G, J&J and TJX, it’s not exactly surprising that investors dumped energy, banking and industrial stocks when financial uncertainty was rampant. One notable exception in 2011: Coterra Energy, then known as Cabot Oil & Gas, actually held up well despite default fears and had a solid 14% rally from the August bottom to the end of the year. Even when macro considerations dominate sentiment, company-specific factors can also matter. And. in 2011 a lot went right for Cabot. In fact, the company’s stock performed best in the S&P 500 in 2011, doubling in price. The big picture, the 2011 data shows why Jim has stressed that the latest debt ceiling row could be a buying opportunity. Despite the extreme carnage during the July to August period, most Club holdings recovered by year’s end — 19 of 31 stocks, or about two-thirds of them. In addition, 12 Club shares in 2011 finished higher than their July 22 closing price, the high of the S&P 500 at the end of July that year. Five of those companies — Foot Locker (FL), Alphabet (GOOGL), Starbucks (SBUX), Estee Lauder (EL) and Linde (LIN) — all saw double-digit percentage declines during the July-August market slumber, a sign investors saw opportunities to buy the dip. The bottom line is that short-term problems are no reason for the market to completely run away in all cash. For patient investors who can look further to the horizon, these pullbacks open the door to building larger positions in large companies. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust portfolio.) As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charity’s portfolio. If Jim has talked about a stock on CNBC TV, he will wait 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH OUR DISCLAIMER. NO FIDUCIAL OBLIGATION OR DUTY EXISTS OR IS CREATED BY YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
WASHINGTON, DC – MARCH 20: Tourists travel along 1st Street near the east front of the US Capitol building on March 20, 2023 in Washington, DC.
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The 2011 debt ceiling debate was a useful, if not ominous, analogy as Wall Street grapples with Washington’s current back and forth over raising the country’s borrowing limit. Concerns about a possible U.S. government default have only deepened in recent days, contributing to consecutive weekly losses in the S&P 500.
