Hello? Is Anyone There?

May 1, 2023

Hello, is anyone there? It’s economic data telling you that the stock market may be poised to fall more than 20% and no one seems to be listening. 

While major indices have seen modest gains so far in 2023, albeit with some wild swings, we’re becoming increasingly confident that the US stock market is set up for sizable losses. Why? It’s in the data. 

Treasuries, Taxes and Debt Ceilings

Data Point #1: Spreads

There’s suddenly a huge spread between one-month and three month Treasuries. That gap is strikingly wider than usual. 

The spread between the one-month and three-month US Treasury rates, referred to as the yield curve, can vary depending on various economic and market conditions. In general, during times of economic expansion and optimism, the spread between the one-month and three-month Treasury rates tends to be relatively small or even positive, with the three-month rate slightly higher than the one-month rate. This is known as a "normal" yield curve. During times of market stress and uncertainty, the spread between the one-month and three-month Treasury rates may widen, resulting in a "steep" or "inverted" yield curve. 

To view the extent of yield curve inversion, one can look to the following data from the St. Louis Federal Reserve. The 3-month T-bill yields are at 5.00%, while 10 year T-bill yields are at 3.55% resulting in an inversion of -145 basis points or -1.45%.

Data Point #2: Tax Revenue

You can thank Uncle Sam for that spread, at least partially. On April 18, Federal tax receipts were due and came in much lower than expected, meaning the government will have less money to pay its bills. 

Here are some years in the past when US tax revenue collections missed expectations:

  1. 2008-2009: During the global financial crisis, US tax revenue collections fell below expectations due to the economic downturn, which resulted in lower incomes, reduced business profits, and lower tax payments.

  2. 2012: US tax revenue collections fell short of expectations due to slower-than-expected economic growth and high levels of unemployment, which resulted in lower incomes and reduced tax payments.

  3. 2020: The COVID-19 pandemic led to significant disruptions in the US economy, with widespread job losses, business closures, and economic contraction. As a result, US tax revenue collections were impacted, with lower-than-expected tax payments from both individuals and businesses.

Data Point #3: Debt Ceiling

Those lower than expected tax receipts have stoked concerns that the government will hit the debt ceiling sooner than anticipated, causing investors to seek out shorter duration bonds that mature before the potential default. Sure, the government can raise the debt ceiling, but it doesn’t appear that investors are so willing to make that bet right now. 

Here are some notable years where this has happened:

  1. 2002 and 2003: The US debt ceiling was reached, and the Treasury Department began taking extraordinary measures, such as suspending investments in certain government funds, to avoid breaching the debt ceiling.

  2. 2011: The US debt ceiling was reached, and this event was particularly notable as it led to a contentious political debate in Congress over raising the debt ceiling, and credit rating agency Standard & Poor's downgraded the US’ credit rating from AAA to AA+ for the first time in history. On August 8, 2011, major stock indices dropped by more than 5%, which was the largest single-day point drop since December 2008. The stock market continued to experience significant swings, falling more than 20% in just 5 trading days. 

  3. 2013: The US debt ceiling was reached again two years later. Members of Congress opposed raising the debt ceiling, which had been routinely raised previously on a bipartisan basis. The crisis ended on October 17, 2013 with the passing of the Continuing Appropriations Act.

Data Point #4: Credit Default Swaps

Another way to measure how likely traders think a US default is, is by looking at credit default swaps. As of May 1, 2023, 1-year U.S. Treasury CDS (sold in Europe) is sitting at 176.535 basis points over the risk free rate. What this means is they're paying $17,653.50 per year to insure against $1M in U.S. Treasuries.

In the US, one year credit default swaps are currently trading above 100 basis points. The last time it was this high was at least 2008 and far higher than other points in history where there were concerns over the government hitting the debt ceiling. Looking farther out, traders are starting to push the cost of insuring five year debt to new levels, with the cost of five year credit default swaps sitting higher than 50 basis points, the highest levels we’ve seen in more than a decade. 

So What

You might want to start rethinking the average 60-40 portfolio. Instead, Blackrock provides an analysis on how investors can evaluate the traditional 60-40 portfolio with alternative investments as a key driver of true diversification. Alternative investments whose return drivers are not as vulnerable to macroeconomic factors will likely play an increasingly important role in the portfolio of retail investors.

As the likelihood of a stock market crash increases, investors should seek to invest in assets that are uncorrelated with equities.


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Disclosures

*Towards Equilibrium Inc. (“Equi”) and Equilibrium Ventures Inc. (“EquiV”) communications are intended solely for informational purposes. They should not be construed as investment, legal, tax, or trading advice and are not meant to be a solicitation or recommendation to buy, sell, or hold any securities including funds mentioned. Any such offer or solicitation can only be made by means of the delivery of a Confidential Private Placement Memorandum to qualified eligible investors. 

EquiV is registered as an investment adviser with the Texas Securities Board Investment Advisers Act of 1940. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the entity by the Securities Exchange Commission.

Past performance is not indicative of future results and an investment in an investment fund involves the risk of loss. The investment fund is speculative and involves a high degree of risk.
The information contained herein is as of the date indicated, not complete and is subject to, and qualified in its entirety by, the more complete disclosures, risk factors, and other terms and conditions contained in the respective offering documents of the respective investment funds. 

Before investing in a fund, you should thoroughly review the offering documents with your legal, tax and investment advisors to determine whether an investment is suitable for you in light of your investment objectives and financial situation. An investment in a fund is not suitable for all investors. 

Asset allocation does not guarantee a profit or protection from losses in a declining market. Investments, when sold, may be worth more or less than the original purchase price.

“Knowledge is wealth, wisdom is treasure, understanding is riches, and ignorance is poverty.”

-Matshona Dhliwayo

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“Knowledge is wealth, wisdom is treasure, understanding is riches, and ignorance is poverty.”

-Matshona Dhliwayo

Receive our market insights. Gain knowledge.

“Knowledge is wealth, wisdom is treasure, understanding is riches, and ignorance is poverty.”

-Matshona Dhliwayo

Receive our market insights. Gain knowledge.

Track Record Disclosures

For more details, see our ADV Part 2A.

Communications from Towards Equilibrium Inc. (Equi) and Equilibrium Ventures, LLC (EquiV) (collectively, “Equilibrium Ventures”) are intended solely for informational purposes, and should not be construed as investment or trading advice and are not meant to be a solicitation or recommendation to buy, sell, or hold any securities mentioned. Any such offer or solicitation can only be made by means of the delivery of a Confidential Private Placement Memorandum, which contains a description of the significant risks involved in such an investment. All figures are estimated and unaudited unless otherwise noted. Past performance is not necessarily indicative of future results. Equi is not registered as a securities broker-dealer or an investment adviser with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, or any state securities regulatory authority.

EquiV is registered as an investment adviser with the Texas Securities Board. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the entity. The opinions and predictions expressed on this website represent the current, good faith views of Equilibrium Ventures at the time of publication, are provided for limited purposes, and are not definitive investment advice. Predictions, opinions, and other information on this website are subject to change continually and without notice of any kind and may no longer be valid after the date indicated. By using this website, you accept our Terms of Use, Privacy Policy, and Privacy Notice. Equilibrium Ventures, LLC is carrying on the business of, or registered and authorized to, provide investment advice only in the jurisdictions where they are lawfully authorized. Equilibrium Ventures is neither a law firm nor an accounting firm, and no portion of the website should be interpreted as legal, accounting, or tax advice.

Past performance is not indicative of future results. Diversification does not ensure a profit or guarantee against loss. No material available through the website shall be used or considered as an offer to sell or a solicitation of any offer to buy the securities or services of any of our affiliated entities. Offers can only be made where lawful under, and in compliance with, applicable law. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by EquiV), will be profitable or equal to any historical performance levels. Investments discussed on the website, if any, may not be suitable for all investors. Investors should make their own investment decisions based on their own financial objectives and financial resources and should obtain independent investment and tax advice before deciding to invest. Graphs, charts, tools, and graphics are used for illustrative purposes only, and may not reflect actual future performance. The contents on this website are provided for limited purposes, and should not be considered definitive investment advice. Equilibrium Ventures does not guarantee any minimum level of investment performance or the success of any investment strategy. As with any investment, there is a potential for profit as well as the possibility of loss. Any links provided to other websites are offered as a matter of convenience and are not intended to imply that EquiV or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites unless stated otherwise. Please see our Terms of Use governing the use of this website.

S&P 500 performance obtained from Bloomberg. References to S&P 500 are included for illustrative purposes only. It is not expected that the Equi funds (Equi Balanced Fund, LP or Equi Growth Fund, LP) will make investments in S&P 500 companies. Accordingly, investors should not expect that an investment in the Equi Funds would provide exposure that is similar to an index investment in S&P 500 companies or any other specific benchmark.

Track Record Disclosures

For more details, see our ADV Part 2A.

Communications from Towards Equilibrium Inc. (Equi) and Equilibrium Ventures, LLC (EquiV) (collectively, “Equilibrium Ventures”) are intended solely for informational purposes, and should not be construed as investment or trading advice and are not meant to be a solicitation or recommendation to buy, sell, or hold any securities mentioned. Any such offer or solicitation can only be made by means of the delivery of a Confidential Private Placement Memorandum, which contains a description of the significant risks involved in such an investment. All figures are estimated and unaudited unless otherwise noted. Past performance is not necessarily indicative of future results. Equi is not registered as a securities broker-dealer or an investment adviser with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, or any state securities regulatory authority.

EquiV is registered as an investment adviser with the Texas Securities Board. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the entity. The opinions and predictions expressed on this website represent the current, good faith views of Equilibrium Ventures at the time of publication, are provided for limited purposes, and are not definitive investment advice. Predictions, opinions, and other information on this website are subject to change continually and without notice of any kind and may no longer be valid after the date indicated. By using this website, you accept our Terms of Use, Privacy Policy, and Privacy Notice. Equilibrium Ventures, LLC is carrying on the business of, or registered and authorized to, provide investment advice only in the jurisdictions where they are lawfully authorized. Equilibrium Ventures is neither a law firm nor an accounting firm, and no portion of the website should be interpreted as legal, accounting, or tax advice.

Past performance is not indicative of future results. Diversification does not ensure a profit or guarantee against loss. No material available through the website shall be used or considered as an offer to sell or a solicitation of any offer to buy the securities or services of any of our affiliated entities. Offers can only be made where lawful under, and in compliance with, applicable law. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by EquiV), will be profitable or equal to any historical performance levels. Investments discussed on the website, if any, may not be suitable for all investors. Investors should make their own investment decisions based on their own financial objectives and financial resources and should obtain independent investment and tax advice before deciding to invest. Graphs, charts, tools, and graphics are used for illustrative purposes only, and may not reflect actual future performance. The contents on this website are provided for limited purposes, and should not be considered definitive investment advice. Equilibrium Ventures does not guarantee any minimum level of investment performance or the success of any investment strategy. As with any investment, there is a potential for profit as well as the possibility of loss. Any links provided to other websites are offered as a matter of convenience and are not intended to imply that EquiV or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites unless stated otherwise. Please see our Terms of Use governing the use of this website.

S&P 500 performance obtained from Bloomberg. References to S&P 500 are included for illustrative purposes only. It is not expected that the Equi funds (Equi Balanced Fund, LP or Equi Growth Fund, LP) will make investments in S&P 500 companies. Accordingly, investors should not expect that an investment in the Equi Funds would provide exposure that is similar to an index investment in S&P 500 companies or any other specific benchmark.

Track Record Disclosures

For more details, see our ADV Part 2A.

Communications from Towards Equilibrium Inc. (Equi) and Equilibrium Ventures, LLC (EquiV) (collectively, “Equilibrium Ventures”) are intended solely for informational purposes, and should not be construed as investment or trading advice and are not meant to be a solicitation or recommendation to buy, sell, or hold any securities mentioned. Any such offer or solicitation can only be made by means of the delivery of a Confidential Private Placement Memorandum, which contains a description of the significant risks involved in such an investment. All figures are estimated and unaudited unless otherwise noted. Past performance is not necessarily indicative of future results. Equi is not registered as a securities broker-dealer or an investment adviser with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, or any state securities regulatory authority.

EquiV is registered as an investment adviser with the Texas Securities Board. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the entity. The opinions and predictions expressed on this website represent the current, good faith views of Equilibrium Ventures at the time of publication, are provided for limited purposes, and are not definitive investment advice. Predictions, opinions, and other information on this website are subject to change continually and without notice of any kind and may no longer be valid after the date indicated. By using this website, you accept our Terms of Use, Privacy Policy, and Privacy Notice. Equilibrium Ventures, LLC is carrying on the business of, or registered and authorized to, provide investment advice only in the jurisdictions where they are lawfully authorized. Equilibrium Ventures is neither a law firm nor an accounting firm, and no portion of the website should be interpreted as legal, accounting, or tax advice.

Past performance is not indicative of future results. Diversification does not ensure a profit or guarantee against loss. No material available through the website shall be used or considered as an offer to sell or a solicitation of any offer to buy the securities or services of any of our affiliated entities. Offers can only be made where lawful under, and in compliance with, applicable law. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by EquiV), will be profitable or equal to any historical performance levels. Investments discussed on the website, if any, may not be suitable for all investors. Investors should make their own investment decisions based on their own financial objectives and financial resources and should obtain independent investment and tax advice before deciding to invest. Graphs, charts, tools, and graphics are used for illustrative purposes only, and may not reflect actual future performance. The contents on this website are provided for limited purposes, and should not be considered definitive investment advice. Equilibrium Ventures does not guarantee any minimum level of investment performance or the success of any investment strategy. As with any investment, there is a potential for profit as well as the possibility of loss. Any links provided to other websites are offered as a matter of convenience and are not intended to imply that EquiV or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites unless stated otherwise. Please see our Terms of Use governing the use of this website.

S&P 500 performance obtained from Bloomberg. References to S&P 500 are included for illustrative purposes only. It is not expected that the Equi funds (Equi Balanced Fund, LP or Equi Growth Fund, LP) will make investments in S&P 500 companies. Accordingly, investors should not expect that an investment in the Equi Funds would provide exposure that is similar to an index investment in S&P 500 companies or any other specific benchmark.