Remember When a “Dollar Saved Was a Dollar Earned?”

By Greg Lai and Alex Hsiao, Co-Chief Investment Officers 

The evidence shows that at this point, handwringing over large deficits hasn’t been the prediction of financial Armageddon.  I’ll admit that this is quite the oversimplification of the complex history of the U.S. fiscal condition.  One look at Jeremy Siegel’s long-term Total Real Return Indices and the performance of the U.S. dollar will give you a real understanding of the negative effects of inflation and the impact that deficits and debt have on inflation.  That said, there is more than enough evidence that stocks have done quite well during periods of government fiscal mayhem.  Let us not forget the most recent Covid period of double-digit trillions of deficit spending has been acutely good for stocks, particularly growth stocks that have risen over 40% over the past year.

Those who are historians of market performance shouldn’t be surprised, but in fact, most bouts of spending consciousness have come before dramatic downturns in the stock market, 1929 included.

In fact, how many of us remember the 1999-2000 market meltdown (many may be too young to remember), but 2000 was the last year that the government even came close to balancing the budget?

From 2000 to now, the debt has gone from roughly $6 trillion to $35 trillion.  Yup, that’s right, 5-fold in 24 years.  I can only look at the facts; the stock market has also had the greatest run in that period.  I’m not an economist, but the GFC and recently COVID have affirmed that such stimulus leading to this debt was warranted if not required.  But as Sherlock Holmes said, or so they say he said, “If the impossible is eliminated then however improbable must be the truth,” and so far, the truth is that deficits have been good for stocks.  However, there is a truth yet to come: deficits can’t be good for our future generations, and fiscal growth will be able to raise all boats.

I wanted to note a chart showing government tax receipts, the other part of the deficit equation.  The chart shows an uptick in tax revenues, and all evidence points to a continued increase.  Going forward, there undoubtedly should be some support in tax revenues from increased capital gains taxes, given stock market performance.  One can imagine the positive effect on tax revenues as the economy looks to have done a “touch and go” and GDP forecasts rise.

So, I leave you with an observation coming into the election. There seems to be no possibility or desire to cut the deficit, if not grow the deficit in the coming years…and that may be good for stocks.

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