By Maurice Stouse, Financial Advisor and Branch Manager
Economic growth can be measured by corporate revenues and profits, GDP growth, productivity growth (latest report is a strong 3.7% for the last three quarters), market performance, low unemployment and the rate of inflation over time.
What is driving all of this, particularly when we look at the growth of the public debt (now at approximately $28 trillion), historically large deficits and recent market volatility?
We can start with the monetary (money supply) stimulus from the Federal Reserve’s balance sheet. That is the assets it owns because it bought bonds on the open market with the newly produced money supply. By buying the bonds it injects money into the economy. Would you believe that at the start of the Great Recession/financial crisis of 2008 that it stood at $900 billion? It grew to $3.8 trillion (2019) pre-pandemic and then peaked at $8.9 trillion in March of 2022.
That is a significant amount of new money that has made its way into the American economy. They call that quantitative easing or QE. It is now coming down steadily as the Federal Reserve is letting things mature and decreasing the money supply. They call that quantitative tightening or QT. The latest read from The Federal Reserve is $7.4 trillion. Inflation grew steadily with the move in the money supply and peaked at 9.1% in mid-2022 and it is now at approximately 3.5%. So, the stimulus is down %17 and inflation is down about 60% even though much of the money that was created in the last 16 years is still out there and that has helped drive consumption, construction, innovation, the economy, and GDP.
Of course, federal spending has an impact as well albeit a two-sided effect: 1) It provides economic stimulus but 2) it also drives up deficits, the debt and borrowing costs for the US government. The US Treasury has had the luxury of paying less the 3% on all of debt held by the public (about 30% of that is held by overseas buyers). We take note that this year the Treasury has to refinance almost a quarter of that, about $7 trillion. There are a lot of new Treasuries hitting the market and the Treasury will have to pay higher rates than it was paying. One recent impact has been the steady rise in yield of the bellwether US Treasury 10-year note. Why are yields going up? When there is a lot of new supply and not a commensurate growth in demand, the price goes down and the yield goes up. At this writing it is at 4.66% and at the start of the year it was closer to 4%. Most of this move was recent and stocks correspondingly sold off. One mitigating factor is the strength of the US dollar. Its year-to-date increase in value is 4.5% (after an increase of 2% for all of 2023). That can have a positive impact for demand for dollar denominated securities like U.S. Treasuries and even though rates are up, can keep borrowing cost lower in the long run.
We are well into earnings season for America’s corporations and thus far about 20% of the S&P 500 (which makes up about 80% of the value of the US stock market) have reported and about 68% are beating estimates. Growth rates (for earnings) for the year are projected to be 11% for 2024. Stock prices typically follow earnings (or sometimes get ahead of them). That is strong growth and typically that is reflected in stock prices unless there are competing priorities (like the 10-year US Treasury), and or an increase in costs of goods and or labor (hurting productivity and profitability).
So, we come down to a few questions: 1) Will the continued drawdown in monetary stimulus eventually lead to lower growth overall because the excess money is drying up? 2) Can the U.S. address its deficit growth? We think yes and the answer lies in healthy and fair, entitlement reform. We believe Social Security and Medicare/Medicaid (the biggest drivers of government spending) can and will be fixed because they can be fixed. 3) Can the U.S. put a lid on public debt and outgrow it with GDP?
This brings us to innovation. The U.S. leads the world in the flow of capital and the incentive to innovate and create. The results are being seen with artificial intelligence, or AI. We are beginning to see the increased impact that is having on productivity and economic growth as mitigating factors. The USA leads the world in innovation but also consumption. We consume a lot of what we build or serve. If we look at the threat many see coming from China, we take note that China is more of a producer and less of a consumer of what it builds or serves. It depends on the rest of the world, the US in particular and that is yet another factor to consider for the long run.
Long-term investing and saving, to us, means that those who save out of fear but invest out of optimism best position themselves to obtain their goals and their dreams.
The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal. The S&P 500 is an unmanaged index of 500 widely held stocks that is considered representative of the U.S stock market. US government bonds and treasury bills are guaranteed by the US government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.
Maurice Stouse is a Financial Advisor and the branch manager of The First Wealth Management/ Raymond James. Main office located at The First Bank, 2000 98 Palms Blvd, Destin, FL 32451. Phone 850.654.8124. Raymond James advisors do not offer -tax advice. Please see your tax professionals. Email: Maurice.stouse@raymondjames.com.
Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC, and are not insured by bank insurance, the FDIC, or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risks, including the possible loss of principal. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc. The First Wealth Management and The First Bank are not registered broker/dealers and are independent of Raymond James Financial Services.
Views expressed are the current opinion of the author and are subject to change without notice. The information provided is general in nature and is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results.
