By Tim Courtney, Chief Investment Officer
Last week, the American Rescue Plan Act of 2021 was enacted, and at $1.9 trillion, it is one of the largest economic rescue plans in U.S. history.
The package includes $1,400 stimulus payments to many Americans, extends unemployment compensation, continues eviction and foreclosure moratoriums, increases the Child Tax Credit and subsidizes COVID-19 testing and vaccination programs, among other provisions.1
The markets have in general reacted positively to the news, and this expected spending was a factor in the S&P 500 and Dow Jones hitting record highs earlier this week.2 On the other hand, some investors and economists are growing apprehensive about the long-term impact from an inflationary and debt servicing standpoint.3
To put things into perspective, the U.S. government’s (federal, state and city) total expected spending for 2021 was around $7.7 trillion even before COVID-19 relief measures were implemented.4 Now, it’s approaching $10 trillion with the American Rescue Plan spending added. This is almost half of the current U.S. GDP, which is around $22 trillion.5 Furthermore, the U.S. debt-to-GDP ratio is now near 100%, a level we only barely eclipsed just after World War II.6
As a result, there is heightened concern the market may rebel against the growing spending with “bond vigilantes” sending interest rates up and bond prices lower.7 Some of this may already be occurring in markets with the 10-year Treasury rate moving above 1.7% this week.8 It is no coincidence that as the spending was announced and interest rates were rising that tax increases were being broadly discussed.
Currently, the U.S. allocates about 4-5% of its budget to paying interest on debt. If rates increase, then interest could quickly become 10-15% of the budget. This would in turn detract from other areas like entitlement spending, benefits, education, defense, etc.9
There is a clear risk to investment assets that may materialize if confidence in the U.S. economy or currency begin to fade, but we do not believe at this point that debt and spending have passed a tipping point. Interest rates appear to be rising mostly as expected during an economic recovery.8 The U.S. dollar has also held on to its value over the last several months, a positive sign that higher federal spending is not adversely affecting confidence in the currency yet. In fact, the U.S. dollar has slightly strengthened as rates have risen.10
We’ll continue to keep a close eye on the situation in the coming weeks. If you have any questions in the meantime, please contact your Exencial advisor.
Sources:
1. Investopedia (3/11/21) – American Rescue Plan (Biden’s $1.9 trillion stimulus package)
2. MarketWatch (3/15/21) – S&P 500, Dow clinch another round of records as investors await Fed meeting
3. The Washington Post (2/4/21) – Opinion: The Biden stimulus is admirably ambitious. But it brings some big risks, too.
4. U.S. Government Spending (as of 3/17/21) – Total 2021 spending by function
5. Bureau of Economic Analysis (1/28/21) – Domestic product, 4th quarter and year 2020 (advance estimate)
6. CNN Business (10/8/20) – The US debt is now projected to be larger than the US economy
7. The Financial Times (2/26/21) – Return of the bond vigilantes: will inflation fears spoil the post-pandemic party?
8. YCharts Year (as of 3/16/21) – Treasury Rate
9. Congressional Budget Office (12/1/20) – Federal net interest costs: A primer
10. MarketWatch (as of 3/16/21) – U.S. Dollar Index (DXY)
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
The Dow Jones Industrial Average (DJIA), also known as the Dow 30, is a stock market index that tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock Exchange and the NASDAQ. The DJIA is the second oldest U.S. market index; the first was the Dow Jones Transportation Average. The DJIA was designed to serve as a proxy for the health of the broader U.S. economy.
The 10-year Treasury note is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity. The U.S. government partially funds itself by issuing 10-year Treasury notes.
The US Dollar Index is used to measure the value of the dollar against a basket of six world currencies – Euro, Swiss Franc, Japanese Yen, Canadian dollar, British pound, and Swedish Krona. The value of the index is a fair indication of the dollar’s value in global markets
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971.