[ad_1]
The 2011 debt-ceiling debate has been a useful, if not foreboding, analogue as Wall Street grapples with the current back-and-forth in Washington about raising the nation’s borrowing limit. Concern about a potential U.S. government default has only mounted in recent days, contributing to back-to-back weekly losses in the S & P 500. If a scenario like 2011 were to play out this year in the market, it would certainly be unsettling. But back then, a last-minute deal was eventually reached and, in many instances, the debt-ceiling weakness in stocks proved to be a great buying opportunity for investors who were willing to step in. So, with history as our guide, we wanted to take a closer look at how our current Club holdings fared in 2011. But first, a little background: The S & P 500 was off to a solid first half in 2011— up about 7% into late July — before being derailed by debt-ceiling drama. The broad U.S. stock index plummeted nearly 17% over a few-week stretch that began in late July and bottomed in mid-August. Democrats and Republicans ultimately reached a deal in early August. However, in the days after, markets were rocked when Standard & Poor’s made the unprecedented decision of downgrading the United States’ top-tier AAA credit rating. The whole saga took the S & P 500 from 1,345.02 on July 22, 2011, to a closing low of 1,123.53 on Aug. 19, 2011 — a decline of 16.5% to be exact. But a robust, 12% rally would take its place from there into year-end, bringing the index to an essentially flat performance for all of 2011. By Feb. 7, 2012, the S & P 500 closed above its late-July peak. Zoom out further: From the Aug. 19, 2011, bottom through this past Friday’s close — May 12, 2023 — the S & P 500 more than tripled in price. That’s more evidence in favor of betting on the markets over the long run no matter how bleak any one situation or pullback may seem in real-time. .SPX mountain 2011-08-19 S & P 500 from Aug. 19, 2011 to present To be sure, it’s impossible to predict exactly how the negotiations in Washington will unfold in the coming days and weeks. But a sense of urgency is present because Treasury Secretary Janet Yellen has said the U.S. may run out of ways to meet its borrowing obligations as soon as June 1. President Joe Biden on Sunday struck an optimistic tone ahead of Tuesday’s meeting with the top four congressional leaders. Republicans, who control the House of Representatives, have demanded cuts to federal spending in order to agree on a debt-limit increase. Democrats, who control the White House and Senate, have argued the U.S. should keep paying its bills with no other stipulations attached. Jim Cramer has urged investors to adopt a more cautious short-term posture as the parties hash things out. The Club has taken up its cash position to around 10% accordingly. This gives us the dry powder needed to be buyers on any future debt-ceiling-related weakness in our favorite stocks. If 2011 is any guide, we also expect opportunities to present themselves this time around. 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 start looking for bargains. Here’s a table detailing how our Club stocks performed during the heated 2011 debt-ceiling debate and how they did for the rest of the year once clear of the crisis. Note: The information above excludes Meta Platforms (META) and Palo Alto Networks (PANW) because those two Club holdings were not publicly traded in 2011. Meta, formerly known as Facebook, and Palo Alto Networks both completed their initial public offerings in 2012. Additionally, Coterra Energy (CTRA) in 2011 was known as Cabot Oil & Gas and traded under the ticker COG. In October 2021, Cabot merged with Cimarex Energy to form Coterra and changed its stock symbol to CTRA. Not a single Club stock made it through the 2011 debt-ceiling drama unscathed — but it’s no surprise that the ones with the best relative performance were Procter & Gamble (PG) and Johnson & Johnson (JNJ), falling only 5.1% and 5.4%, respectively between July 22 and Aug. 19 of 2011. Both companies are classic defensive plays. When equity investors are worried about a catastrophic financial event such as the U.S. government defaulting on its debt, they are going to seek out the perceived safety of consumer-staple and health-care firms like P & G and J & J. A similar rationale seems to explain why TJX Companies (TJX) had the third-best relative performance, falling only 5.9% during the 2011 debt-ceiling jitters. The off-price retailer is viewed by many as a defensive stock because consumers squeezed by a slowing economy, or even a recession, may increasingly seek out the bargains found at T.J. Maxx, Marshalls and Home Goods. TJX had a great rest of the year, too, gaining 22% from the S & P 500 index’s 2011 August bottom to year-end. This time around, the Club certainly expects defensive-oriented stocks to hold up better than the overall market if there’s no resolution soon. “Don’t make a move unless you’re buying a stock that does well into a recession because that’s what Wall Street will presume we’re going to go into if this battle drags on,” Jim said last week. Many of the worst-performing Club stocks during the 2011 debt fight are the kinds of companies that typically are hurt by a slowing economy, such as oilfield services provider Halliburton (HAL) and financial Morgan Stanley (MS). Those stocks each lost a third of their value between July 22 and Aug. 19 of 2011. Pioneer Natural Resources (PXD), another energy stock, and industrials such as Honeywell (HON) and Caterpillar (CAT) were also among the biggest laggards in that period. Similar to the outperformance seen with P & G, J & J and TJX, it’s not exactly surprising to see investors dump energy, banks and industrial stocks when financial uncertainty reigned supreme. One major exception in 2011: Coterra Energy, then known as Cabot Oil & Gas, actually held up OK despite the default fears, and had a solid 14% rally from the August bottom into year-end. Even when macro concerns dominate sentiment, company-specific factors can matter, too. And. in 2011, a lot went right for Cabot. In fact, the company’s stock was the top-performer in the S & P 500 in 2011 , doubling in price. Big picture, the 2011 data shows why Jim has stressed that the latest debt-ceiling squabble may be a chance to buy. Despite extreme carnage during the July-to-August stretch, most Club holdings rallied into year-end — 19 of the 31 stocks, or about two-thirds of them. What’s more, 12 Club stocks finished 2011 higher than their July 22 close, the S & P 500’s late-July peak 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 market’s July-to-August swoon, a sign investors saw opportunities to buy the dip. The bottom line is that short-term problems for the market aren’t reasons to completely run away into all cash. For patient investors who can look further out on the horizon, these pullbacks open the door to build out bigger positions in great 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 will 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 charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF 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 U.S. Capitol building on March 20, 2023 in Washington, DC.
Chip Somodevilla | Getty Images
The 2011 debt-ceiling debate has been a useful, if not foreboding, analogue as Wall Street grapples with the current back-and-forth in Washington about raising the nation’s borrowing limit. Concern about a potential U.S. government default has only mounted in recent days, contributing to back-to-back weekly losses in the S&P 500.
[ad_2]
Source link