Zacks Investment Management

Not long ago, the notion of spending trillions of dollars on an economic plan or a government budget would have raised many eyebrows. Today, it seems like spending trillions is just part of the daily discourse – not only for the U.S. government, but also for governments abroad.

In the wake of the pandemic, global government debt has swelled to its highest level since World War II. Global debt is so high, in fact, that it exceeds global output (GDP). Indeed, global government debt rose to 105% of global GDP in 2020, up from 88% in 2019.¹

The International Monetary Fund created a useful graphic to track global debt levels (blue line) since 1880. As you can see, World War II was the last time the world was anywhere near current debt levels, and debt-to-GDP dropped off substantially when the war ended.

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When You’re Uncertain About the Markets, Focus on Fundamentals!

Global government debt is at its highest level. While the global economy is expected to grow, the market could still feel the impact of higher debt loads. For investors, it makes sense to worry about ever-increasing debt, but we think it makes more sense to stay focused on your long-term financial situation and balance sheet.

To avoid having worries and concerns drive short-term decision-making, it’s better to focus on key economic indicators that can make a positive impact on your financial success.

To help you do this, I am offering all readers our just-released Stock Market Outlook report. This report contains some of our key forecasts to consider such as:

• Zacks rank S&P 500 sector picks
• Zacks view on equity markets
• What produces 2021 optimism?
• An update on the outlook for Covid-19
• Top stocks in top industries
• Sell-side and buy-side consensus
• And much more

If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! 

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Here in the U.S., the Federal Reserve Bank of St. Louis has charted federal public debt as a percent of GDP since 1966, which you can also see is very high relative to recent history. The debt issue will not get any better this year, either – the U.S. government is on track for a budget deficit of $3 trillion for the second year in a row, which does not even factor current spending plans making their way through Congress.

So, why is this global swell of borrowing happening, and what does it mean for markets and investors?

Let’s start with the ‘why.’ Jump-starting the post-pandemic economic recovery is of course a big driver of new spending. But behind this spending is the memory of a lackluster recovery in the aftermath of the 2008 Global Financial Crisis, where many developed countries believe they did not spend enough and where fiscal austerity – particularly in Europe – started too quickly. Another popular economic theory is that aging populations, high savings, and weak private investments are creating slack in developed economies, and governments are increasingly stepping in with spending to boost overall output.

But perhaps the biggest driver of rising debt loads has to do with cost. As government debt has become – and remained – inexpensive, it has also grown in size substantially. Even as budget deficits swell and total debt rises, the cost of borrowing in the U.S. (as measured by U.S. Treasury bond yields) has remained historically low. The government has passed multiple trillion-plus dollar stimulus packages, and yet the yield on the 10-year U.S. Treasury remains well below 2%. In other words, the U.S. continues to issue debt at a very low cost.

Long duration bond yields tell us about interest rates on new debt, but another key metric to observe is how much the federal government is spending on debt (interest payments) as a percentage of total federal spending. In other words, if federal spending was increasingly going to make interest payments on debt – instead of spending directly in the economy – then there would be reasonable cause for major concern. But we are not seeing that today. The ratio of interest payments to total spending is also historically low:

Just because borrowing and debt-servicing costs are modest does not mean rising debt levels are risk-free or even low risk. There are plenty of reasons to look forward cautiously. Inflationary pressures, which we are seeing currently here in the U.S. and abroad, can push interest rates higher over time. If interest on debt ever exceeds a country’s GDP growth rate, it could spell trouble for debt-servicing costs and maybe force a government to raise taxes or allow inflation to ease the debt burden – neither of which is a good outcome.

Bottom Line for Investors

Government spending is in the formula for calculating GDP. When government spending goes up, it’s a positive contributor to total output. This is not to say government spending always creates a multiplier effect or leads to increases in growth and productivity. Many would argue the opposite is true, which is another topic for another day.

There are issues with too much government borrowing and spending. Inflation can become an issue, interest rates can go up, and the private sector can be crowded out of financing and investing. At worst, if the government is picking winners and losers with spending, the private sector may respond by pulling back on investment in areas where the government is too big of a force.

The key to debt sustainability is having growth higher than interest rates. If an economy can grow faster than the interest rate paid on debt, then there is a good chance the debt will be manageable. This is the current situation in the U.S., but it may change in the not-too-distant future.

No matter the current state of the economy, investors should always stay financially prepared. We recommend focusing on the facts and key data points that can positively impact your long-term investments.

To help you do this, I am offering all readers our just-released August Stock Market Outlook report. This report contains some of our key forecasts to consider such as:

• Zacks rank S&P 500 sector picks
• Zacks view on equity markets
• What produces 2021 optimism?
• An update on the outlook for Covid-19Top stocks in top industries
• Sell-side and buy-side consensus
• And much more

If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! 

Free Download – Just-Released August 2021 Stock Market Outlook⁷

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