Transcript:
Concerned about the drama in Washington DC? In this video, I'll be exploring the latest political drama in Washington and how it might impact the markets, economy, and your portfolio.
Many investors have concerns over the impact of political gridlock and the national debt. Over the next few minutes, we'll look at three key charts that can help all investors to maintain perspective amid ongoing issues in Washington.
As of the recording of this video, the role of the Speaker of the House remains vacant. And given the current composition of Congress (namely the house), we are likely going to hear more about a potential government shut down and rising federal debt.
What this comes down to is the fact that politics matter for all of us as citizens, taxpayers and voters. However, it's important to separate our political views from our investment portfolios and financial plans. Current times highlight why it is important to have a financial plan that accounts for increased political and economic uncertainty. Let's walk through why this in the case.
First, this chart shows the level of interest payments that the federal government pays on the national debt each year. You can clearly see that it has risen in recent years, both because the national debt has grown and also because interest rates have risen.
The blue line corresponds to the axis on the left which shows the amount of interest payments in billions of dollars. The latest figure for 2022 shows that the government paid $476 billion in interest alone. As a percentage of the country's GDP, this was around 1.8%.
In addition, the dotted lines show projections by the Congressional Budget Office, a nonpartisan and independent group that assists Congress in policy research. Their forecasts show that, based on current trends, this number could rise to $1.4 trillion, or 3.7% of GDP by 2033.
Second, some of this is due to the national debt itself which has been hovering near historic levels over the past several years. You can see on this chart that the total debt is now 119% of GDP.
One note here is that some of this debt is owed by the government to itself, since government agencies often buy and hold Treasury securities. Excluding these inter-governmental holdings results in a net debt figure of 94%. Regardless of how you slice it, it's clear that the national debt has increased dramatically.
However, while this is an important issue that needs to be addressed as citizens, taxpayers and voters, it's important to maintain perspective when it comes to our investment portfolios. Markets have done quite well over the past couple of decades despite ongoing concerns with the debt and deficit. In other words, rather than make investment decisions based on the national debt alone, it's important to construct a diversified portfolio that takes into account higher interest rates and a financial plan that considers future tax legislation.
Finally, not only is Congress still without a House speaker, at least at the time of this recording, and there is also a presidential election coming up.
Once again, it's important for investors to not lose sight of historical facts. While politics are important, there are numerous other factors that impact markets and the economy. History shows that the stock market can perform well in a variety of different environments, regardless of who controls the White House and Congress. Investors who made portfolio decisions based on politics over the past few cycles would have missed out on strong returns.
All investors should be aware that Washington headlines will continue to be in the news over the next year. For this reason, it's more important than ever to stay focused on market and economic fundamentals rather than day-to-day politics.
And if you are feeling concerned about these developments, now is the time to revisit your financial plan. We can discuss steps to improve your confidence in you plan and begin thinking through the steps you may take to better address political and economic uncertainty.
I hope you found these insights helpful. As always, please reach out if you would like to discuss this further. I look forward to talking to you soon.
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