Source: Congressional Budget Office

This week’s graph is a bit of a bummer, so if you are having a “rainbows and butterflies” type of day, maybe just skip it. The chart is the Congressional Budget Office’s (CBO) projection of the national debt as a percentage of output if we don’t make any changes to current taxes and spending. We are already at World War II levels, and the projected uptick is steep.

There is a solid argument out there that says that the national debt really doesn’t matter that much. I tend to agree with a lot of that – to a point. I also believe that there is a level at which it very much will matter. I buy into the CBO’s statement that:

“High and rising federal debt makes the economy more vulnerable to rising interest rates and, depending on how that debt is financed, rising inflation. The growing debt burden also raises borrowing costs, slowing the growth of the economy and national income, and it increases the risk of a fiscal crisis or a gradual decline in the value of Treasury securities.” ¹

The good news is that this is a ratio. If Gross Domestic Product (the denominator) goes up, then the overall percentage goes down. If we produce more than anticipated, it may not look quite so bad down the road.

Will we reach a point where changes will be required? As I look at this chart’s big picture, I think we will eventually have to face the spending and revenue numerator in this ratio. Yes, I mean changes to both government spending and taxes. I warned you that this wasn’t a feel-good read.

At some point, it seems likely that this level of debt will matter enough that we need to act. That being said, there are a lot of variables at play. If you’d like to dig in and find out what drives this projected ratio, “The 2020 Long-Term Budget Outlook” is very readable – plus, it has a lot of great charts!

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¹ Congressional Budget Office. “The 2020 Long-Term Budget Outlook.” PDF file. September 21, 2020. https://www.cbo.gov/system/files/2020-09/56516-LTBO.pdf

When special US government programs distribute money to individuals broadly, we often wonder how the money was actually used. It can occur after a natural disaster, and it happened in March with the $2.2 trillion CARES Act stimulus in response to the pandemic.

Federal Reserve Bank of New York economists published in Liberty Street Economics the results of surveys they conducted to answer this very question. You can read the entire report, “How Have Households Used Their Stimulus Payments and How Would They Spend the Next?” Here are the key points:

• While the payments ($1,200 for qualifying adults and $500 for each child) were a significant boost to the economy, only a small share (29%) was spent by June 2020. The remaining funds were allocated to savings (36%) and paying down debt (35%).

• Survey results suggest “households expect to consume even smaller shares of a potential second round of stimulus payments, while they expect to use a higher share to pay down their debt”.

• Across all demographic sectors, an average of 8% of the funds were spent on non-essentials, such as hobbies, leisure or other items not absolutely necessary. This 8% is included in the 29% spent by June 2020, as is 3% which was donated.

• The same survey found respondents receiving Unemployment Insurance payments during June consumed in approximately the same percentage (28%), but that amounts allocated to savings were less (23%) and a greater amount was used to pay down debt (48%).

• The New York Fed Survey of Consumer Expectations (SCE) is a nationally representative, internet-based survey of approximately 1,300 U.S. households. The analysis in the post is based on data collected as part of two special surveys on the pandemic fielded in June and August, 2020. In the June survey, 89% of respondents reported that their households had received a stimulus payment.

While the allocation of these payments varies among differing income and age levels, the results speak to the high uncertainty of how long the pandemic will last and the possible economic impact on recipients. Questions abound about how much money will be needed and when. For example, were parents concerned about “holding the spot” with their daycare provider? Was there concern about how long rent forbearance would last? Concern about layoffs this fall?

For a rough validation of the results of the survey, you can consider that the average U.S. FICO credit score increased in July to 711, the highest level in the past 15 years. Consumer debt levels represented by credit card balances have also decreased from $6,934 in January to $6,004 in July.

The average American was likely using sound financial strategy with their stimulus payments. The choice to forego spending where possible, add to cash reserves, and reduce personal debt is a healthy one during uncertain times and should reduce the possible negative economic implications as we work out of this situation.

Suzanne T. Mestayer is managing principal of ThirtyNorth Investments, LLC.

All investment strategies have the potential for profit or loss.

ThirtyNorth Investments, LLC, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.

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At a firm where one of our key investment principles is that “time matters”, I love a chart that show why we value it. Before I dig in though, let me say loud and clear that past performance does not guarantee future results. I use history to teach me, but I don’t count on it repeating itself.

I’ve told you before that I’m a skeptic by nature, so I’m going to start by focusing on the bottom of each range. These are the worst 1, 5, 10, and 20-year-end returns from 1950-2019. It’s the historical worst-case return.

The first thing that jumps out is that a single year downside in a diversified stock portfolio has been as bad as -39%. Got it. In a single year, it can be bad – really, really bad; however, there has historically been enough good that the 5-year worst return is much less negative at -3%. That is significantly better, but let’s be real, if I lose 3% over 5 years, I’m a little frustrated. Frankly, if I have been in the market for 10 years, and I lose 1%, I’m still frustrated.

Here’s how time matters: if I coached myself to stay steady through some of those frustrating 5 and 10 year periods, the 20-year stock portfolio would have resulted in the most beneficial range of returns for my long-term goals. A stock portfolio’s worst 20-year return over the last 69 years was positive 6% – better than a bond portfolio or a 50% bond and 50% stock portfolio. On top of that, it also had the larger upside periods.

Let’s take a step back and look at the blue bars representing a diversified bond portfolio and the grey bar representing a portfolio that is 50% stock and 50% bond. It’s clear that the bond portfolio can act as a ballast. For the end of each year over the 69-year period, a 50% bond portfolio never had a negative worst-case return in a period longer than 5 years.

If you are still tracking with me, I’m going to give you my favorite nugget from this chart. The best 10-year returns on a 50% stock 50% bond portfolio are the same as a bond portfolio, but their worst case is better! I tend to think about bonds helping to limit losses, but in the 10-year time periods, including stocks in the portfolio actually limited downside as well.

Time does matter.

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