Does a strong stock market equate to a strong country? Part Two of TwoSubmitted by Headwater Investment Consulting on August 3rd, 2017
By Kevin Chambers
Last week, we started to examine how the US economy stacks up against other major countries around the world. We found that the US has the largest GDP, relatively low unemployment, and the highest productivity of the developed world when comparing the GDP to hours worked. (Read about these indicators here.) Two other key economic indicators are inflation and government debt.
Inflation levels show the rate at which prices are rising in an economy. Although high inflation is a bad thing for an economy, some inflation is necessary so an economy doesn’t become stagnate. The central banks of most countries target 2% as a healthy amount of inflation. Inflation of 2% shows the economy is growing at a reasonable rate. The two main drivers of inflation are commodity prices and the labor market.
As of the end of 2016, prices in the US were growing at 1.3%. This places the US in the middle of the pack with Canada and Australia. China leads with 2% inflation. The UK, Japan, and EU have struggled to grow prices the last 2 years with growth near zero.
The amount of debt carried by the government can affect the financial health of an economy. With a high debt balance, the government has fewer options to deal with unexpected scenarios. It increases the chance that they increase taxes or impose austerity (S.K., 2015).
Debt of the US government has climbed in the last decade from 55% of GDP in 2007, to 100% of GDP in 2016. Although this is high, the US is not the worst offender. The UK is over 100% and Japan is at 200%. Australia and Canada have been able to keep their debt at around 50%.
The US stock market has been on a tear. There are a lot of explanations for why this has been happening. It can partially be attributed to the relative strength of the US economy. Compared to the rest of the world, our economy is one of the strongest. We have good GDP and inflation growth. Unemployment has fallen to pre-crisis levels and our workers are productive. Although our debt is high, it is not out of the ordinary.
Although many people in our country are struggling financially, on a macro level we are looking strong. Wall Street doesn’t always follow the macro economy. The stock market has been on an almost unprecedented run. This analysis reminds us the importance of building diversified portfolios. It is hard to predict what will happen in the world. Maintaining a mix of global and US securities as well as equity and fixed income. Going forward, we hope the stock market continues up; however, having a diversified portfolio best positions your investments for multiple market scenarios.