Is The National Debt Bad For Stocks?

Published on: 10/12/2021

In this edition of Chart Talk, Tony Ogorek and Jeff Viksjo discuss the correlation between the stock market performance and the rising national debt.

 

TRANSCRIPTION

 

TONY:

Welcome to another edition of Chart Talk.  I’m Tony Ogorek, I am here with Portfolio Manager, Jeff Viksjo.  And today, Jeff, we have a chart that takes a look at two things that typically don’t seem to be correlated, but that may not necessarily be the case once you see this chart.  And that would be the performance of the stock market, as well as the increasing debt that the federal government is taking on.  And a lot of people are very concerned about this at this point.  They think that the rising debt has to be paid off at some point.  They don’t quite understand the role of a reserve currency in the world and they also don’t necessarily understand the role the Federal Reserve plays in this whole debt market.  So, let’s take a look at the chart, what do you see here?

 

JEFF:

Yea so Tony, the green line shows the level of the national debt as you can see, it has gone up exponentially, especially over the last 10 years or so, since the Great Financial Crisis.  The black line is the stock market and look, it's right there with the national debt.  Tony, I don’t know about you, but when I look at this I think rising national debt is good for stocks, because rising national debt means more spending.

 

TONY:

That’s right.  More spending, more government contracts.  People, you know, 70% of our economy is based on the consumer, and with more money sloshing around, it's beneficial for the financial markets.  So, bottom line is, that money has to find a home somewhere, and apparently Jeff, it’s found a rather nice home in the stock market.

 

JEFF:

And the question is of course; “is the rising national debt good until it isn’t?”.  Is there a level that sets off a catastrophe?  But Tony, as crazy as it is right now, there actually isn’t enough debt in the market place.  We have $27 Trillion in debt, and the treasury rates are at 1.5%, clearly the market wants more.

 

TONY:

Yes it does and as long as we continue on that trajectory, like you said, it’s good until it’s not. But when you look at past history, and you look at these levels of debt, it seems to be a positive for the stock market.

So, thank you for joining us for this edition of Chart Talk, and we look forward to seeing you at our next talk.

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