The level of US debt, already elevated before COVID-19 hit, skyrocketed as Congress put into place much needed fiscal stimulus in response to the pandemic, and it may jump again as the Biden administration targets its stimulus goals. Markets have seemed unfazed by fiscal stimulus measures, and they’ll likely stay that way at least through 2021, but there will likely be economic consequences in the long term.
Debt Levels Soaring
US Federal government debt is likely to pass 100% of gross domestic product (GDP) in 2021, a level only seen during the massive World War II war effort. Markets have seemed largely unfazed by skyrocketing government debt levels. To the contrary, they have seemed to embrace the improved economic outlook that comes with stimulus. At the same time, concern over debt levels have become more widespread.
While some pundits have been dismissive of growing debt concerns, we think the reasons for increased scrutiny are clear and grounded in common sense. You don’t get something for nothing, so at some point rising debt levels will have consequences. There are also concerns about the moral hazard that can come with unchecked spending. Increasing debt levels may be justified, but we should at least be wary enough about it to have a sense of a reasonable point for restraint. Finally, many view the debt not as the government’s but the people’s, and we naturally want our representatives to be careful with our dollars.
Why have markets seemed indifferent to the rising national debt and when, and how, will it end? The answer to the first question is that we’re still well positioned right now for additional spending to have a reasonable positive impact on the economy with fewer of the usual risks. As to when the market indifference will end, at the very least, probably not in 2021 or even 2022. But eventually debt will likely weigh on growth, whether through periods of relative austerity or from economic consequences, but the impact can be spread out over time, especially if the political will comes around quickly enough.
Click here to read the rest of the report.
IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
US Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.
Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.
All index data from FactSet.
Please read the full Outlook 2021: Powering Forward publication for additional description and disclosure.
This research material has been prepared by LPL Financial LLC.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
| Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value |