Stocks spent all of Wednesday in negative territory as uncertainty surrounding the debt ceiling and possible default weighed on sentiment.
Attention was temporarily diverted by this afternoon's release of the minutes from the latest Fed meeting, which showed "several" central bank officials supporting a pause in rate hikes.
The bulk of today's headlines centered on the debt ceiling, with negotiations between Democrats and Republicans reportedly stuck on spending limits. "Rather than increasing spending in the next budget, President Joe Biden has proposed a spending freeze and limits on future fiscal-year spending increases, while Republican House Speaker Kevin McCarthy has emphasized that spending in the coming years must be reduced significantly," says José Torres, senior economist at Interactive Brokers.
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While Republicans believe spending is needed to reduce the country's growing debt, doing so this year could lead to a sharper economic downturn, Torres adds.
Speaking virtually at a Wall Street Journal summit in London earlier, Treasury Secretary Janet Yellen said that it "seems almost certain" the U.S. will not be able to pay all of its bills "past early June." She also warned about the potential for "substantial financial-market distress" in the lead up to a potential deal being announced, citing the 2011 debt ceiling crisis as historical precedent.
Fed meeting minutes show support for a pause
The debt ceiling was also a topic of discussion at the May Fed gathering. According to the meeting minutes that were released this afternoon, "[m]any participants mentioned that it is essential that the debt limit be raised in a timely manner to avoid the risk of severely adverse dislocations in the financial system and the broader economy."
As for interest rates, the minutes showed that "several participants" believed the Fed might not need to raise rates any higher "if the economy evolved along the lines of their current outlooks." However, the minutes also underscored the importance of monitoring incoming economic data.
"We get another consumer price index print and jobs number before the next Fed decision, so we assume the pause or hike will ride on the temperature of that data," says John Luke Tyner, portfolio manager and fixed-income analyst at Aptus Capital Advisors. The next Fed meeting is scheduled for mid-June, and Fed funds futures are pricing in a 74% chance the central bank will pause on rate hikes.
Abercrombie, Kohl's stocks rally after earnings
In single-stock news, Abercrombie & Fitch (ANF) soared 31.1% after the apparel retailer disclosed an unexpected profit in its first quarter. The company reported earnings per share of 39 cents on revenue of $836 million. ANF's top line likewise beat Street estimates.
Kohl's (KSS, +7.5%) was another retail stock rallying after earnings. The department store chain reported first-quarter earnings of 13 cents per share on sales of $3.6 billion, with both figures exceeding consensus forecasts.
Strength in these consumer discretionary stocks wasn't enough to boost the broader market, though. At the close, the Dow Jones Industrial Average was off 0.8% at 32,799, the S&P 500 was down 0.7% at 4,115, and the Nasdaq Composite had shed 0.6% to 12,484.
Stay focused on the long term
Market participants are taking in a lot of noise right now, and that can make it hard to focus on long-term investment goals. However, it's critical to remember that investing is a marathon, not a sprint. Even in 2011, after a nearly 20% drop in the S&P 500 in reaction to debt ceiling drama, it took only four months for the index to hit a new high, writes the Global Investment Strategy Committee at the Wells Fargo Investment Institute. "We favor looking through near-term volatility to focus on the longer-term factors impacting relative performance, such as the economic cycle, Federal Reserve policy or interest rates," the committee says.
Taking the long-term view is why we at Kiplinger so often explore the best stocks to buy or the best ETFs to buy from all corners of the market. It's because these investments provide patient investors with the highest probabilities of success over the long haul. For instance, we continually update our list of the Dividend Aristocrats – the 67 best dividend stocks for reliable income growth. And for those that want a broader approach, we recently updated our list of the best SPDR ETFs to help investors build a solid, low-cost core portfolio.
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