DES MOINES, IOWA – JULY 15: Democratic presidential candidate, former US Vice President Joe Biden … [+]
Some of the things that helped boost the economy this year could hurt it next year, a new study suggests.
“Fiscal stimulus implemented in 2023 partly explains why the market and economy surprised to the upside,” says a report from Ned Davis Research. “The fiscal injection was so large that it more than offset the tightening of monetary policy. »
Specifically, lower taxes and increased spending helped prop up the economy and increase budget deficits, the report said.
Government data tells us the fiscal 2023 deficit will be $1.7 trillion, up from 2023. about $1.4 trillion a year ago.
But this situation of government stimulus which stimulates the economy and the stock market may not last. The taxpayer-funded boost the U.S. economy received this year could have an entirely different tone. The Ned Davis report puts it this way:
- “Fiscal tightening, even unintentional, could weaken the relatively positive election year trend for stocks. Since World War II, the S&P 500 has risen a median of 10.7% in election years, the second best of the four, after pre-election years.
The report lists a few items that might not be repeated.
First, the FDIC deposit insurance payments made in the spring, when Silicon Valley Bank and others suffered, may not be repeated. This represents an annual change of $101 billion, according to Ned Davis’ analysis.
Tax receipts on diminishing capitalization gains
Tax revenues have decreased due to the decline in capital gains. This makes sense given that the stock and bond markets have had an absolutely terrible year in 2022, with markets down considerably. The S&P 500 posted a total loss (including dividends of minus 18% last year, according to data collected by Slickcharts. Meanwhile, long-term investment-grade bonds fell 27%, the worst since 1842. according to CNBC report.
With such losses, there were far fewer capital gains for investors and therefore fewer taxes owed to the government.
Additionally, Social Security payments saw a double-digit increase of 11%, largely due to inflation adjustments. But it still costs $136 billion more than the previous year.
Defense spending increased 6.7%, or $49 billion. This is understandable given growing conflicts around the world, such as in Ukraine, and concerns over Taiwan’s independence.
The concern then is what happens to the markets. As the research note notes, election years are often good for investors because incumbent leaders tend to try to improve the economy, so things go well when people go to the polls.
Stocks Could Still Be Good
For Wall Street, a weaker economy could still be a good thing, as interest rates could fall along with a weaker economy. Interest rates are one of the key elements in how analysts value stocks.
For the Biden administration, a weakening economy could lead to a shift away from Democrats. It is often argued that Americans vote with their wallets. In other words, if the economy is doing well, incumbents are re-elected, otherwise they are ousted. At least that’s the theory.