U.S. Government Debt, Economic & Market Trends – Global Stocks
November 14, 2018
October 2018 was full of economic trend reversals and rising stock market volatility accompanied by lower inflation and lower prices for commodity and stock indexes. Lower inflation usually leads to lower bond yields. However, this year’s annual U.S. deficit is on track to be near $1.5 trillion as total U.S. Government Treasury (TSY) security issuance hit $1 trillion (Figure 1). Greater TSY supply will most likely keep TSY yields higher than they would be relative to recent inflation/economic trends. Yesterday, Saudi Arabia announced that it would cut oil production, which has reversed the recent -20% plunge in oil prices. The combination of higher TSY yields and higher energy prices will sustain higher market volatility, resulting in higher economic uncertainty.
Stocks are responding to the higher economic uncertainty. Technically, the Dow Industrials hit a new high, while broader indexes did not. The S&P 500 and a few other broad indexes recently closed below their 200-day moving average price at a time when their respective 200-day moving averages are in downtrends. This observation and non-confirmations by Dow Theory and many market breadth indicators make it more likely that global stocks have or soon will enter a bear market. On top of all these factors, the economic expansion (second longest since 1900) and stock market (fourth longest since 1906) are long in the tooth.
- Rising stock market volatility.
- An emerging market crisis.
- A slowing U.S. housing market.
- Weak oil prices, which
- brings inflation down.
- A stronger U.S. dollar, which
- weakens commodity prices.
- High government deficits and greater supply in U.S. TSY, which
- sustains interest rates higher than norm.
- A debt-to-gross domestic product (GDP) ratio near 104%, which significantly lowers economic growth.1
Figure 1. Gov’t Deficit & Treasury Debt Issuance Rise Sharply – Dec 31, 1999 - Oct 31, 2018
Source: U.S. Department of the Treasury and the St. Louis Federal Reserve
Figure 2. Treasury Debt to GDP & Total Gov’t Debt to GDP – Dec 31, 1995 - Oct 31, 2018
Chart courtesy of http://www.StockCharts.com.
InFocus Highlights- Figure 3 begins March 1, 2007 and ends November 12, 2018.
- Since May 2007, the Dorsey Wright Country and Stock Momentum Index (DWCSM), the S&P 500 Total Return Index (SPXTR) and the MSCI World (ex. USA) Index have recorded cumulative returns of 196%, 148% and -14% while YTD their respective returns are -8.2%, 3.7% and -11.3%. (Figure 3).
- Despite a recession and bear market in 2007-2009, DWCSM bests SPXTR and MSCI World (ex. USA). DWCSM’s risk/reward profile makes it an appropriate diversifier in a global portfolio.
- Goldman Sachs and a few other Wall Street firms expect a recession no later than 2020. Bear markets typically begin two to 12 months before most recessions. Over the past 118 years, the U.S. has experienced 23 recessions. The Dow Industrials declined during every recession, with the only three exceptions being the recessions of 1918-19, 1926-27, and 1945.
Figure 3. DWCSM, SPXTR & MSCI World (ex. U.S.)
Chart courtesy of http://www.StockCharts.com. DWCSM performance prior to December 5, 2017 is based upon back testing its methodology.
1Thomas Herndon, Michael Ash and Robert Pollin of the University of Massachusetts, Amherst (2013), found that over the last eight centuries “the average real G.D.P. growth rate for countries carrying a public debt-to-G.D.P. ratio of over 90 percent is 2.2 percent.
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