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Cause for Optimism?

By January 12, 2023January 17th, 2023Blog

We have been saying to subscribers that we are not always convinced by rallies in the S&P 500. There’s so much to worry about: low consumer confidence, inverted yield curves, rising interest rates.

But, the market is the aggregation of everyone’s opinion – so let’s try and figure out what might be driving such positive sentiment.

The first chart shows the US budget deficit as a percentage of GDP. A deficit is an expansionary fiscal policy, as the government is adding more to the economy in spending than it is taking out in taxes. At the latest reading (third quarter of 2022), the US federal budget deficit is 5.5% of GDP.

The US has almost always run a budget deficit (the last budget surplus was from 1998-2001), with the current 5.5% level being in the normal range. Nonetheless, this level of support likely goes some way to explaining why the US economy has been so resilient over the past year.

The second chart shows the US 10-year real yield – that is, the actual US 10-year bond yield (4.1%) less the annual inflation rate (7.1%). In effect, it shows the real cost to borrowers of taking out debt.

As we can see, the real yield in the US is now -3.0%. This is one of the widest levels in history.

A negative real yield is expansionary monetary policy, despite official interest rates being at their highest level in over a decade.

In total, then, what we can see is that fiscal and even monetary policy are both reasonably accommodative at the moment. Wisdom of the crowds – perhaps the market is getting it right after all! Time will tell.


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