U.S. Credit Rating Could Face Another Downgrade

Fitch analysts said, “The brinkmanship over the debt ceiling, failure of the U.S. authorities to meaningfully tackle medium-term fiscal challenges that will lead to rising budget deficits, and a growing debt burden signal downside risks to U.S. creditworthiness.”

Notably, Fitch also suggested that novel solutions such as minting a $1 trillion coin or invoking the 14th Amendment would also likely lead to a downgrade.

S&P downgraded its rating of long-term U.S. government debt from AAA to AA+ in 2011 following a prolonged battle over the debt ceiling and passage of a fiscal package the rating firm deemed insufficient. According to S&P’s downgrade, the legislative package fell “short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.”

Furthermore, “America’s governance and policy making [has become] less stable, less effective, and less predictable than what we previously believed.”

We have no unique insight into the credit-ratings firms’ processes, but the U.S. is still facing the same tandem of troubling headwinds—unsustainable debt trajectory and governing volatility—that served as the basis of S&P’s downgrade in 2011. The key difference between then and now is that total U.S. debt has increased from $14.8 trillion to more than $30 trillion.

Isaac Boltansky

Housing Slump Persists

AM Charts

BMO Financial Group
May 25: Loan applications to purchase a house fell again last week and continue to mine the lowest levels in eight years.

That’s not surprising, given the tight constraints on both sides of the sales equation. Demand has been pinched by tighter credit standards and the weakest affordability in over three decades, while supply is getting squeezed because so few homeowners want to give up the low-rate loans undertaken in 2020-21.

So, even though the yearlong slump appears to have ended, don’t expect the housing market to come roaring back to life. That likely awaits next year, assuming the Fed eases policy and the economic fog fades.

Sal Guatieri

Gas Prices Will Bite

Market Commentary

Navellier
May 25: The Energy Information Administration, or EIA, on Wednesday announced that crude-oil inventories plunged by 12.5 million barrels in the latest week. Additionally, gasoline inventories declined by 2.1 million barrels in the latest week, while the inventory of distillates (e.g., diesel, heating oil, jet fuel, etc.) declined by 600,000 barrels.

Bespoke Investment Group reported that crude-oil inventories are now well below the five-year average, while crude-oil exports are at a record high, and crude-oil imports are near a five-year low.

Additionally, gasoline demand is very close to a five-year high, so the seasonal demand during Memorial Day weekend is expected to reduce inventories further. Prices at the pump are expected to rise.

Louis Navellier

Stock Market Tailwinds

Global Investment Strategy

BCA Research
May 25: Once the debt-ceiling soap opera ends, investors will likely turn their attention to some of the tailwinds supporting stocks. These include stronger earnings growth, diminished bank stresses, better housing data, early signs of an up-leg in the manufacturing cycle, the prospects of an AI-driven productivity boom, and the fact that labor slack has managed to increase without rising unemployment.

Investors should resist turning bearish on stocks for now but look to become more defensive later this year.

Peter Berezin

Compelling Currency Trades

Weekly Update

The Aden Forecast
May 25: The
U.S. dollar index
has been on the rise. Boosted by higher interest rates, it’s rapidly approaching an important resistance level near 104.50. The dollar index will be firm by staying above 103.

Keep in mind, once this temporary rebound rise is over, the dollar is still set to fall further in its continuing bear market. Keep your dollars in 90-day T-bills. The euro and the Swiss franc have been under downward pressure while the dollar moves higher.

These currencies are bullish, and if you have them, continue to keep them. Once these downward corrections end, they’ll be poised to head higher.

Pam and Mary Anne Aden

CRE: Risks Are Overdone

CIO Weekly Commentary

Nuveen
May 22: Banking system instability, still-elevated interest rates, and high vacancies in office buildings have been hogging the headlines in commercial real estate. Some of these concerns may be disproportionate to the degree of actual risk reflected in the broad commercial real estate asset class.

In public markets, for example, office and regional mall properties, which together accounted for nearly 20% of the FTSE Nareit All Equity REITs Index five years ago, have each seen their weightings cut in half, to just 4.5% and 3.3% of the index, respectively. Meanwhile, the industrial, data centers, wireless towers, and self-storage sectors have grown increasingly important, thanks to prudent use of debt and strong cash flow growth….

We see pockets of value [in the office sector]. We’re not optimistic on the sector overall, but we are finding opportunities in select deals that have repriced materially lower, largely due to market sentiment.

We favor the highest-quality (class A+) properties that are able to retain and attract tenants paying top-of-market lease rates. Yields for investment-grade office bonds are in the low-double digits—far higher than for other property types.

Saira Malik

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