Washington is polarized, but there does seem to be agreement that spending is set to increase, which will increase national debt. The details on the current budget request are uncertain, but according to The New York Times:
The first of Mr. Biden’s presidency, calls for total spending to rise to $8.2 trillion by 2031, with deficits running above $1.3 trillion throughout the next decade.
The growth is driven by Mr. Biden’s two-part plan to upgrade the nation’s infrastructure and substantially expand the social safety net, contained in his American Jobs Plan and American Families Plan, along with other planned increases in discretionary spending.
The spending increase may be less important to investors than the fact that national debt is set to increase.
Federal government debt as a percent of GDP has been above 100% since 2012. Stimulus programs to offset the effects of the pandemic pushed debt to more than 120% of GDP.
Some economists worry that debt can slow economic growth and harm the stock market.
There is a precedent to help economists and investors understand the impacts of government debt.
Japan offers investors lessons on high levels of government debt. Debt topped 100% of GDP in 1995 and is now near 240%.
Japan’s Stocks Rose Despite National Debt
High National Debt Doesn’t Have to Be Bearish
As the chart above shows, while rising debt as a percent of GDP could be bearish, stocks can rise when national debt holds at stable levels, even at high levels.
This is an example of how the market hates uncertainty. When debt was rising, Japanese stocks struggled. Once debt reached a new record and stabilized, the Nikkei benchmark index began a rally.
That chart holds an important potential lesson for investors in the U.S. Debt is rising, but the increase appears to be certain. Without a new crisis similar to COVID-19, the upcoming increase in debt could be predictable and budgeted.
Japan’s experience shows stocks can rise with high levels of national debt. That should give the bulls some hope for the long run in the U.S.
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Michael Carr is a Chartered Market Technician for Banyan Hill Publishing and the Editor of One Trade, Peak Velocity Trader and Precision Profits. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Mr. Carr is also the former editor of the CMT Association newsletter, Technically Speaking.
Follow him on Twitter @MichaelCarrGuru.