Debt ceiling in focus

In May, we witnessed a mixed performance in the global stock markets. The focus was on the debt ceiling issue in the United States, but eventually, a solution was reached, resulting in the lifting of the ceiling.

Overall for the month, the U.S. S&P 500 index increased by 0.4 percent measured in USD, while the European Stoxx 600 index declined by 2.3 percent measured in EUR, and the Nordic VINX fell by 2.9 percent measured in NOK. In our home market, the Oslo Stock Exchange was down 2.2 percent (OSEBX).

Heavy debt burden

As we have observed on previous occasions, such as in 2011, there has been uncertainty surrounding the raising of the debt ceiling in the United States. However, during May, a solution was eventually reached to raise the ceiling once again. In the short term, the consequences of prolonged negotiations could have potentially led to a default on U.S. government debt. In the longer term, the accumulation of debt in various countries remains problematic. For instance, the U.S. national debt has increased from 80 percent prior to the pandemic to approximately 100 percent today. The contours of the European sovereign debt crisis demonstrated the potential consequences of a significant debt burden, ultimately leading to Greece defaulting on its debt. At that time, the former European Central Bank President, Mario Draghi, delivered his famous "whatever it takes" speech to prevent the crisis from spreading further. In light of the significant increase in interest rates, the focus on this issue could reemerge.

Resilient macro indicators

Thus far, households and businesses have demonstrated resilience in the face of rising interest rates. Low unemployment rates and a robust labor market have helped households absorb some of the impact of rising rates, despite the reduced purchasing power resulting from high inflation. However, monetary tightening often manifests itself with a lag, as increased interest costs impact refinancing, among other factors. During the pandemic, consumer spending remained stable, while the services sector suffered due to lockdown measures. Recently, consumer spending has normalized, and there has been a recovery in the services industry. Additionally, it now appears that consumer spending and indicators for the manufacturing sector are bottoming out after the reopening following the pandemic. If this trend continues, the business cycle could be further extended, and the recession postponed.

Breathing room for the industry

In Europe, gas prices have had a significant impact on growth prospects. Following last fall's peak, there has been a notable reduction in gas prices, providing European households and industries with some breathing room. Currently, gas prices have returned to the levels observed in spring 2021, approximately one year prior to the invasion of Ukraine. If this trend continues, it will be positive for the European economy. Lower energy costs will also help alleviate inflationary pressures and reduce the likelihood of wage-price spirals. Despite base effects contributing to a decrease in inflation in Europe and the United States, the market is still pricing in two interest rate hikes by the European Central Bank.

The road ahead

Global stocks, measured by the MSCI World index in local currency, declined by 0.9 percent. However, due to the depreciation of the Norwegian krone, the same index increased by 4 percent measured in Norwegian kroner. Optimism surrounding artificial intelligence contributed to the strong performance of major U.S. technology companies, while smaller and more cyclical companies performed weaker. Going forward, the specter of a recession is likely to persist, but at the same time, the business cycle could be extended if consumer spending bottoms out. Stocks also offer protection against inflation, making them a favorable long-term investment option for wealth accumulation.