What debt ceiling deadlock means for markets ⚖️

- And: Discover why the French economy might outperform its European peers. Enjoy some of the top intelligence from Goldman Sachs. --------------------------------------------------------------- In today's edition: - Find out [how deadlock over the U.S. debt ceiling could affect financial markets](. (And [test your knowledge with a quiz]( on the subject.) - After the highs of 2022, could the [U.S. dollar be past its peak?]( - And [we speak to the director-general of the BBC]( about how the U.K's national broadcaster is still evolving after more than 100 years. (Was this newsletter forwarded to you? [Sign up now.]( --------------------------------------------------------------- How could the debt limit impasse impact equity markets? If previous episodes are any guide, the [wrangling over the U.S. debt ceiling could create uncertainty for financial markets]( according to Goldman Sachs Research. The Treasury Department was forced to begin taking special measures last month to keep paying its obligations as the federal government bumped up against its $31.4 trillion borrowing limit, setting the stage for a political stand-off to raise the debt ceiling later this year. David Kostin, the chief U.S. equity strategist in Goldman Sachs Research, says the current political environment shares some similarities with 2011, when a debt-limit standoff caused significant disruption. The S&P 500 fell by 17% from peak to trough in just 22 trading days. Volatility, as measured by the VIX Index, tripled. Although the debt limit was raised on Aug. 2, 2011, equity markets didn't reach their trough until Aug. 8, 2011, following the Standard & Poor's downgrade of the U.S. sovereign debt rating from AAA to AA+. Typically though, these events only have a limited impact on equities, Kostin says. The S&P 500 had a median peak-to-trough decline of just 4% in the last five episodes, with none besides 2011 triggering a drop of even 5%. That said, stocks with a higher exposure to government spending tend to be more vulnerable, according to Kostin. A basket of 77 stocks tracked by Goldman Sachs analysts with at least 20% of their sales tied to government spending has lagged the S&P 500 by a median of five percentage points in the weeks ahead of the four most recent debt-limit deadlines. The basket consists primarily of stocks from the health care, aerospace and defense, professional services, and materials industries. --------------------------------------------------------------- Why the US dollar may be past its peak The U.S. dollar may have soared against other major currencies in 2022, but [the greenback is likely past its peak]( according to Kamakshya Trivedi, the head of currencies, interest rates and emerging markets strategy in Goldman Sachs Research. During our [31st annual Global Strategy Conference]( in London last month, Trivedi said the prospect of lower headline inflation, a less aggressive Federal Reserve hiking cycle and an improving growth outlook in regions such as China and Europe, create a “very negative mix” of news for the U.S. dollar. Goldman Sachs' Kamakshya Trivedi at the Global Strategy Conference “We think the dollar has peaked,” Trivedi says. “We don't think we are going to revisit the highs in the dollar you saw at the peak of the U.K. fiscal fears last year…Even with the dollar depreciation that you have seen so far from its peak, the dollar remains a pretty overvalued asset. There is a fair amount of overvaluation to unwind.” For the dollar to continue declining, there will need to be a sustained shift in capital flows away from dollar assets towards those in Europe and the rest of the world, Trivedi adds. “It's barely started. That needs to go a lot further for further strength in the euro [and] weakness in the dollar.” The U.S. currency could still have a second wind, Trivedi says. He doesn't expect a U.S. recession or that the Fed will necessarily have to cut interest rates in the later part of 2023. However, it will probably take time and evidence of resilient growth for the market to align with that view, he says. “The U.S. economy is also more resilient to the interest rate hikes delivered in other parts of the world, so you might see phases of dollar strength over the next three to six months.” --------------------------------------------------------------- Could France outperform its European peers? France's economy is expected to have a [period of weakness this year, but the country will narrowly avoid a recession]( according to Goldman Sachs Research. Data revealed that French GDP expanded in the final quarter of 2022, but three factors could be crucial to the country's economic performance in 2023: - Energy: France is less exposed than other European countries to the continent's energy crisis because its economic growth is less reliant on industrial production (and, thus, gas) for growth and is not as dependent on Russia for the gas. “The natural hedge of a diversified economy, lower exposure to gas and strong fiscal support,” underlie the Goldman Sachs Research view for France to outperform its European peers. - Inflation: Consumer inflation in France was among the lowest of the EU countries in 2022, due in part to significant fiscal support. But as 2023 arrives, several factors are skewing inflation risks to the upside. For one, the energy price caps that proved so effective last year in limiting gas and electricity inflation are increasing at the beginning of this year. Additionally, 2023 also brings a 1.8% increase in the minimum wage, affecting about 15% of the country's labor force. - Government intervention: France's government is “walking a narrow fiscal path” with a number of factors in the coming year that could “catalyze a re-focusing of investors on French fiscal issues,” according to Goldman Sachs Research. For example, the government's budget includes growth expectations of 1.0% for 2023, which is currently above consensus. The way the government reacts to consumer inflation could lead to a larger primary deficit if price growth surprises to the upside. Moreover, the French government could face pushback from the European Commission and other member states on the European Council on its above-consensus growth projections. They could force it to downgrade those projections and plan for more aggressive efforts to address debt accumulation. --------------------------------------------------------------- Giving employees a bigger ownership stake can boost returns Above (L to R): Pete Stavros of KKR and Alison Mass of Goldman Sachs Investment firm KKR has seen promising results from employee ownership programs in its portfolio companies. On a recent episode of [Exchanges at Goldman Sachs: Great Investors]( Pete Stavros, co-head of Americas private equity at KKR, describes how an employee ownership model is creating wealth for workers while generating some of the highest returns for KKR in decades. Employee ownership is growing. When KKR bought garage door manufacturer C.H.I. Overhead Doors in 2015, only a small sliver of the employees held equity ownership in the company. Over the next seven and a half years, KKR expanded ownership levels to all of C.H.I.'s nearly 1,000 employees — all of whom got substantial cash payouts when the company was sold to Nucor Corp. last year. As a result of the ownership culture, “we started measuring employee engagement, acting on the feedback that we got, delegating decision-making rights to workers,” Stavros says. “So we built a health clinic. We built an on-site cafeteria. We built new break rooms…We were able to reduce scrap. We were able to drive inventory down, drive labor productivity in the plant, increase the efficiency of the routes our truck drivers drove.” For KKR, the sale generated the highest return in 30 years. “When we sold the business, we made 10 times our money for our investors,” Stavros says. “Workers made hundreds of millions of dollars. We had truck drivers make almost a million dollars, factory workers make six and a half times their annual income. It was a real win across every dimension.” Stavros attributes his “human capital-oriented approach to investing” to hearing stories from his father, who worked in construction, about the lack of alignment between workers and employers. “My dad, being in a union and us living through a lot of worker strife and strikes, certainly led to a real appreciation of the importance of labor relations,” he says. “You want more hours because you get paid for every hour you work, and your employer wants to control labor costs so they want fewer hours.” [Listen to the full podcast.]( --------------------------------------------------------------- After more than 100 years of broadcasting, the BBC is still evolving In an [episode of Talks at GS]( Tim Davie, the BBC's director-general, highlights how the U.K.'s national broadcaster is adapting to two significant challenges: rapid market change and the age of rampant disinformation. Above (L to R): Anthony Gutman of Goldman Sachs and Tim Davie of the BBC - Disinformation poses a “massive” challenge. About 70% of the world's population no longer have access to a fully free press, Davie tells Talks host Anthony Gutman. “It is a huge fight,” he says. “And a massive challenge. And we have to decide together, as societies and individuals, how we're going to sort this out. Because the trend lines are terrible.” - The speed of market change is “unforgiving.” For more than 100 years, the BBC has entertained and informed audiences around the world. But the emergence of competitors like Netflix and TikTok has undoubtedly transformed the broadcasting and digital landscape. Davie says his focus isn't on beating rivals, but about being distinctive and differentiated. “I'm not trying to chase every opportunity. I've got to focus,” he says. “The instinct is, and the BBC has done a bit of it in the past, let's just go wide and wide to cover off every base, every community. No. Focus on where we're utterly different.” --------------------------------------------------------------- Briefings brainteaser: This isn't the first debt ceiling saga Since 1960, how many times has U.S. Congress raised, extended or revised the debt limit? A) 61 B) 78 C) 84 D) 95 [Check your answer here.]( --------------------------------------------------------------- ICYMI: In the media [Bloomberg]( February 2 [Goldman Sachs' Moe on Market Strategy]( (11:10) [Investment Week]( 1 [Opinion: Breakthroughs and bargains reveal value in biotech]( [Bloomberg]( 27 [Goldman's Oppenheimer says European recession 'isn't happening']( (2:14) --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. Goldman Sachs believes the data in this newsletter is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. Goldman Sachs has no obligation to provide any updates or changes to the data. No investment decisions should be made using this data. To the extent this newsletter includes material from Goldman Sachs Global Banking & Markets, please [click here]( for information relating to Goldman Sachs Global Banking & Markets material and your reliance on it. To the extent this newsletter includes material from Goldman Sachs Asset Management, please [click here]( for additional disclosures. 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