Many people think that chalking up too much debt is bad and it applies to individuals as well as countries. USA is the world’s biggest debtor and investors who have money in US are worried that she may not be able to return all the outstanding loans if she continue to accumulate heavy debts. Most people will cringe at the news of budget deficit and it usually leads to the thought that the economy will not be doing well and likewise for the stock market. Does deficit really affect the stock market? Ken Fisher urges investors to challenge widely accepted beliefs, and he proved that Federal Budget deficit is good news for stocks.
He recorded the high points (large surpluses) and low points (large deficits) of the federal budget surplus/deficit as a percentage to GDP. The data used was from 1947 to 2004. He then investigated the performance of stock market returns (S&P 500) the following year from these highs and lows. The surprising fact is that the average returns from S&P 500 following a surplus year is -1.8% while it is +21.6% following a deficit year. See the table below for details of his findings:
| High Points | Surplus (% to GDP) | Susequent S&P 500 price returns in 12 mths | Low Points | Deficit (% to GDP) | Susequent S&P 500 price returns in 12 mths |
| Q3 1947 | 3% |
2.60%
|
Q4 1949 | -3% |
21.80%
|
| Q4 1950 | 5% |
16.50%
|
Q4 1953 | -1% |
45%
|
| Q4 1955 | 2% |
2.60%
|
Q1 1958 | -2% |
31.70%
|
| Q4 1959 | 2% |
-3.00%
|
Q1 1967 | -1.8% |
0%
|
| Q4 1968 | 1.8% |
-11.40%
|
Q1 1971 | -2.4% |
6.90%
|
| Q3 1973 | -0.2% |
-41.40%
|
Q1 1975 | -7% |
23.30%
|
| Q1 1979 | -0.2% |
0.50%
|
Q3 1982 | -5.6% |
37.90%
|
| Q4 1988 | -2% |
27.30%
|
Q2 1992 | -5.5% |
10.40%
|
| Q4 1999 | 2.2% |
-10.10%
|
Q2 2003 | -4% |
17.10%
|
| Average | 1.51% |
-1.80%
|
Average | -4% |
21.60%
|
He challenged that no one should look at budget deficit at it’s absolute value. It should always be expressed in a percentage to the country’s GDP. For e.g., in 2006, the deficit was $423 billion which sounded a lot in absolute value. If compared to the $13 trillion GDP, it is a 3.25% deficit.
Today, US deficit is estimated to be $1.3 trillion which is about 10% of her GDP. According to Fisher’s findings, it should be a very good year for stocks.
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