Last week I warned how some of the most popular US stock indices are being heavily influenced by a handful of stocks, specifically a certain chipmaker that has now become the most valuable company in the world. As I write this on Friday morning, that chipmaker’s stock price is down around 10% since Wednesday, dragging down the S&P 500 with it.
Meanwhile, the Dow is up about 1%. As investors sell shares in these mega-tech companies to take some gains off the table, we hope to see those proceeds reinvested in other stocks to broaden the market gains.
A combination of higher market valuations and an accelerating national debt are seeping into the forecasts (known as capital market assumptions) we use for retirement planning. The current national debt is almost $35 trillion, but we can’t look at that number without considering the output of the US economy. It might be shocking to hear that someone has a $10 million mortgage, until you find out they have a $10 million annual income. The same holds true when evaluating the US national debt, which is why we look at the debt as a percentage of GDP (gross domestic product). The data is readily available to show the debt-to-GDP ratio is currently 97%.
This week, current US Treasury Secretary and former Fed Chair Janet Yellen was asked about the national debt and she said,
“If the debt is stabilized relative to the size of the economy, we’re in a reasonable place.”
So, basically, she said the debt isn’t a problem as long as it doesn’t grow faster than the economy. Since Congress is the branch of federal government that passes budgets, let’s look at their forecast for how the national debt will grow relative to the size of the US economy.
Source: Congressional Budget Office – https://www.cbo.gov/publication/59946
While Janet Yellen, and the rest of us, would like to see the debt relative to the size of the economy stabilized, Congress doesn’t see that happening any time soon based upon current forecasts. This will only be addressed through
- A crisis, and/or
- Higher taxes and reduced government spending, likely resulting in slower economic growth
As the problem gets potentially worse, many financial institutions are baking one, or both of these scenarios into their market forecasts. For example, Vanguard updates and publishes their 10-year market forecasts quarterly.
IMPORTANT: The projections or other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of March 31, 2024. Results from the model may vary with each use and over time. For more information, please see the Notes section below.
Notes: These probabilistic return assumptions depend on current market conditions and, as such, may change over time.
Source: Vanguard Investment Strategy Group.
https://corporate.vanguard.com/content/corporatesite/us/en/corp/vemo/vemo-return-forecasts.html
To be clear, Vanguard doesn’t have a crystal ball that makes their projections better than everyone else.
I only highlight their forecasts because I believe they have a sound process behind them and they are updated more frequently than most. Every August, we receive the published results of an annual survey of approximately 40 financial institutions that provide guidance to pension and institutional portfolio managers. We look forward to seeing the updated 10- and 20-year market forecasts included in that publication later this summer.
Have a great weekend.
Jack C. Harmon II, CFP®, CIMA
Principal, Harmon Financial Advisors
Registered Principal, Raymond James Financial Services
Harmon Financial Advisors, Inc. is an independent, fee-based financial planning firm and an independent Registered Investment Advisor. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. and Harmon Financial Advisors, Inc. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Harmon Financial Advisors, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc.
Keep in mind that individuals cannot invest directly in any index. Past performance does not guarantee future results. Individual investors’ results will vary.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
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 High Yield Dividend Aristocrats® index is designed to measure the performance of companies within the S&P Composite 1500® that have followed a managed-dividends policy of consistently increasing dividends every year for at least 20 years.
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