The House Speaker and the President finally agreed to a deal on the debt ceiling. After the announcement, a collective cheer resounded across social media and the news this weekend. Equity futures even smiled a bit.
But we still must wait for Congress to make it official before June 5. I believe the pressure to get this deal across the finish line will be great enough to make it happen.
While the overall sentiment that a deal is getting done may boost the markets in the short term, there really isn't a lot of specific language in the bill we can apply directly to the markets. Defense spending versus non-defense spending probably isn't going to move needles, especially as non-defense is a bit too nondescript.
There is one sector that might get some play from the debt ceiling agreement: clean energy. Clean energy, specifically natural gas, looks to be a benefactor in the proposed bill. I'll watch for some pin action in the group here on Tuesday, although my takeaway from the bill didn't draw any negatives on traditional oil and gas.
Overall, the energy sector could use any catalyst to get it moving as we head into the summer travel months. On the flip side, consumers would prefer to see oil prices continue to struggle with prices in the range of the mid $70s per barrel until the bears win out and push us back into the $60s.
A continued dip in the cost of gasoline and energy might be enough to fend off a full-fledged recession for a bit longer and even help with housing as demand continues to fight off higher interest rates.
Gasoline costs were a huge driving factor for inflation in 2022. Ultimately, oil cratering could be what the Fed needs to back off on the interest rate front as long as consumers don't push those extra dollars into housing and other discretionary goods. It's as if I'm begging folks to save a little extra money right now so we don't give the Fed any reason to push interest rates higher by another quarter point in June. If not June, then the end of July.
I already worry we've pushed a bit too far, too fast, and another quarter point could be the tipping point that sends the economy tumbling. Perhaps it won't quell the demand for housing, but it finally may impact prices significantly and hurt both homeowners and commercial real estate.
We've reached a stasis around where I live and in the areas of other professionals that I speak with, where home prices have regressed a bit but held steady overall. Sure, they were overheated in many places, so some cooling is fine.
Watching prices drop 5% or 10% after the run isn't bearish. It's natural and a needed pullback. When we start hitting 15%, then homeowners get nervous. People will feel trapped if pullbacks are 20% to 25%. Only cash buyers might consider selling once you factor in the cost to sell of 5%, give or take a percentage point or two, and add in the elevated mortgage rates. Everyone else is trapped.
If my mortgage was $500,000 at 3.25%, now I can only afford a mortgage of $325,000 at 7% to keep my principal and interest the same on a 30-year mortgage. Tack on watching your home's value decline 20% or 25%, and you have folks who can only afford half the house they could have gotten in late 2021. It's a tough justification.
Unless your portfolio is heavy into energy, go ahead and pull for lower gasoline prices, enjoy that summer vacation, but also hope folks save a little bit of the extra cash so the economy can cool enough for the Fed ultimately to step away from the continued raises.