Markets Calm, Debt Ceiling Standoff, New Reality for Private Equity

What's happened recently?

‍Over the past two weeks markets have been remarkably calm. The S&P 500 is up relatively flat since May 12th with very little market volatility or variability of returns amongst sectors. Markets seem to be weighing the possibility of a recession and the effects of the debt ceiling negotiations, but there hasn’t been a significant catalyst to move markets in one direction or another.

Here are a few things standing out in the news:

• Ongoing debt ceiling negotiations
• The consumer remains strong
• Private equity looking for liquidity amid lower valuations

Why is this important?

‍The debt ceiling continues to dominate market concerns, as discussed more extensively in our previous market update (May 12th). While markets have been relatively calm recently, investor anxiousness has understandably increased as we inch closer to the Treasury’s expected default date of June 1st. However, the U.S. economy remains resilient, underpinned by strong consumer spending.

• The economic data continues to be finely balanced, providing no significant upside or downside surprises to investors.
• Amid these calmer public markets, we continue to see the effects of the Fed’s quick rise in interest rates over the past year. We can see this in continued pressure on regional banks which are curtailing loans to business and consumers.
• Private markets are beginning to embrace the new reality of less liquidity and lower valuations. Private investments continue to provide opportunities for investors, but must now price in an environment with higher interest costs and less liquidity.

What's our take?

Over the coming weeks, we should continue to see markets react to news around the debt ceiling negotiations.

• We have high certainty that Washington will avoid a default, even if it might be at the 11th hour.
• Investors might have taken a bit of a breather the past couple of weeks, but looking forward, markets could see more volatility whether it's from the debt ceiling or if economic conditions don’t meet investor expectations.
• Investors haven’t been overly enthusiastic about the market, despite the S&P 500 being up around 16% since October last year (see chart above). While this does contribute to near term investor anxiety, it could be a source of market upside if economic conditions or the debt ceiling resolution surprise positively.

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