While the stodgy big cap indices such as the Dow have been impressively green, under the surface areas such as the Small caps seem to be awakening from their slumber as the Schwab Small Cap Index has advanced over 10%.

These moves have been a direct result of lower interest rates as the 10-year treasury has now moved from its peak of 5% back to 4.46% and still a long, long way from under 1% it was just a few years ago.

With the big bounce out of the way it’s important to now focus on where we go from here.

The end of this week marks another congressional showdown as the US faces the November 17^th debt ceiling and a new Speaker of the House that seems to be grappling with the difficulties of finding a balance between parties, in order to pass some sort of resolution that keeps our government running into year end. Unfortunately, from what I am hearing and reading, it doesn’t look promising.

This week Moody’s downgraded the US economic outlook from stable to negative, citing fiscal deficits. In my opinion, it certainly doesn’t help to have a Congress that can’t seem to agree on a budget to keep the government open much less any discussion that tackles our ongoing deficits and country’s significant debt load.

At present, interest on our country’s debt load is set to be $659B  Based on our 2022 US Budget of $6.5 Trillion, this interest expense now represents approximately 10% of our annual budget. To put this in context, consider a household income of $120,000 spending $12,000 per year on interest alone! To say this is unsustainable, in my opinion, is an understatement.

When folks ask me why I believe interest rates must come down in the future, I explain the math above and my view that it is simply not possible for our country to continue operating any of our social services such as Medicare and social security when interest expense occupies 10% of a budget that is already running in the red. In fact, why do we even call it a budget at all?

Unfortunately, it is at this point when conventional wisdom with regards to the stock market, in my opinion, comes to an end. It would be logical to conclude that in the future, these fiscal problems will most certainly result in economic struggles and lower stock prices when in reality, what we’ve seen recently is just the opposite.

While I remain as bullish as I’ve been in quite some time, I cannot completely disregard the growing concerns of our US debt, fiscal lack-of-budget, and our monetary system as a whole. My view is really quite simple, interest rates in my opinion have topped and will continue to come down, stocks will benefit from this and Mr. Market will wait patiently to dish out its next round of pain until all those who have rushed into the security and safety of 5% treasuries are lured back into the markets for fear of missing out. The only question is how long will the party last?

Until next time

~ Quint

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