The government’s year-end is usually September 30th. With that being said, the data is finally out on the financial strength of the US government. The US government brought in $3.4 trillion in tax revenue this year. Most of it was backloaded at the end of the year, post-pandemic. At the same time, the US spent $6.5 trillion. That caused a deficit gap of about $3.1 trillion, which is the largest net year-over-year increase since World War II. It is up 47% and because of that, we get a lot of questions and hear a lot of people concerned about this. That is a large increase and a good reason to show concern. However, the good news on that is that the interest rates and inflation are so low that the overall borrowing cost on that debt to the United States, dropped 9% year-over-year from September 2019 to September 2020. We rarely see a drop in borrowing costs like that. Even though the absolute level went up at a historic pace because of the pandemic and everything we had to spend, our borrowing costs are less. Why is that important for markets? International investors still see the US as the best in the world because we can handle the cost of the debt. Markets, to a large degree, are cashflow animals that keep international funds flowing here to our market.
We received a lot of conflicting data last week that showed a very strong consumer, year-over-year. Consumer spending was up 5.4% and up nearly 2% month-over-month. However, on the other side of that, we saw that industrial production and capacity utilization went down along with a week over week increase in unemployment claims. Almost 900,000 people were added to the unemployment claims numbers which are sort of conflicting when you look at the increase in consumer spending. How can the consumer be strong when there are no jobs and when the industrial sector is not hiring, and we are seeing the unemployment rate go up? The answer is stimulus and savings. We saw early during this crisis, the consumer savings rate spike because people were not able to spend the money they made. On top of that, we saw large transfers of funds from the federal government to the individual that went in and boosted savings further. Right now, we are seeing consumers starting to spend down those savings, which is keeping consumption up as they can leave their house and go out and start spending money again. However, that savings rate must come from somewhere. One of the negative impacts that happen to the market when the consumer starts spending down their savings, is that when wages go up, people save and invest more, and those investments push market prices higher. If consumers are not able to get jobs and wages, then that means the money they are spending is coming from investment and savings which could push down the market. That is why we have seen a lot of questions about the stock market going up even though the talk of more stimulus is positive, the deficit will still go up. We kind of have this window where we can reduce the cost, almost like refinancing a mortgage. You may increase the amount of the mortgage, but your monthly payment goes down because rates go down creating more funds to spend. We’re seeing that with the federal government where they able to refinance all this debt, increase spending, hand that to the consumer, and then in the short term, the consumer while they’re unemployed, has more money to spend and invest. We have seen the small investor come back to the market. If we do not see another stimulus deal, you might see that small investors leave the market just to cover their day-to-day needs. We are seeing the spending coming from somewhere which has put us in a good news, bad news situation. The good news is that the consumer is hot. The bad news is that they are spending it from savings right now and those savings are likely coming from the market, which is why we may see the market get some downward pressure.
On the surface, there was a 1.9% rise in retail sales which is a really good number, but when we are looking at the technicals, it tells a story. On Friday, the S&P 500 closed 100 points over its 20-day moving average. The reason we look at these short-term trends is that we are 15 days away from the election, We’ve mentioned before that we are going to see a lot of volatility in the market starting around the middle of October. Now that we are at the midway mark of this month, we are in the middle of it. We are seeing resistance levels of 3,565 with a support level of 3,315. When we report these two numbers, they are usually a lot closer together instead of a large gap like they are now. This spread shows that we do not know what the consumer’s going to do. It is going to be very telling in this next week or two where the markets are going to go from here. When you see that large of a gap, that historically means there will be volatility. That support zone is a good area to look at where the market may fall. When the gap is that big, you may see these huge drops in the market, which we’ve seen in September and early October where the market, when it falls, it falls fast and it falls far on the smallest of news. What will cause it? We are not sure, but it is indicative of volatility. We are not saying that it is showing the market’s going one way or the other. It is just saying when the market does move, it is going to move fast, and it is going to move big. That is something to keep an eye on.
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