Market Recap – March 3, 2017

Stocks Keep Moving Higher, the Difference Between Debt and Deficits

  • Stocks rally following Trump’s Congressional address Tuesday night
  • The words budget, debt and deficit were hardly mentioned in the speech
  • Snapchat IPO off to a good start

Stocks rallied sharply on Wednesday following President Trump’s speech Tuesday night. Wednesday made up over 100% of this week’s gains as investors responded positively to continued plans to cut corporate taxes and reduce business regulations. For the week, the Dow increased 0.9% while the S&P 500 increased 0.6%.

While taxes and regulations were focal points during the speech, there was very little mention of the budget, debt and our deficit in spite of a lot of spending discussion. The national debt is the country’s total amount of debt outstanding. Our debt currently stands around $20 trillion. Roughly 3/4th of the total debt is held by public investors and the rest is debt owed to other parts of the government. This intra-government debt includes the Social Security trust fund. There is no cash in the trust fund, rather the general budget has promised to payback the trust fund in the future. The US Gross Domestic Product is ~$18.5 trillion, so we currently have slightly more than a years’ worth of economic output in debt outstanding. For comparison, in 2007, US debt to GDP was 65%. Germany is currently around 75% while Japan is close to 230%.

The deficit is the annual shortfall between what the government spends and what it collects in taxes. The deficit for fiscal 2017 is projected to be ~$550 billion. This means that the government will need to borrow an additional $550 billion, increasing our total debt outstanding, to fund the shortfall this year. While we had a couple balanced budgets in the last years of the Clinton administration, total debt outstanding has increased every year since 1957. That means even in those years with a balanced budget on paper, the government still needed to borrow small amounts to fund the spending. No one really knows how long we can keep borrowing hundreds of billions of dollars a year to cover government spending. We’ve never had a problem borrowing money, interest rates are at historical lows, but it would have been nice to hear a plan or commitment to fiscal responsibility on Tuesday night.

Snapchat issued shares to the public (IPO) for the first time this week. Snapchat is the latest social media company to go public and is a very popular video/picture app with people under 25 years old. The company currently has a market valuation of ~$35 billion. To put that in context, that is the same size as well-known companies such as Deere, Adidas, General Mills and Southwest Airlines. While the market is valuing these companies similarly, Snapchat generated only $500 million in sales last year and lost over $500 million. It’s crazy that a company with $500 million in sales could be worth $35 billion. Southwest had sales over $20 billion and net profits over $2 billion last year. There was one unlikely winner in the IPO. A private high school in California invested $15k a few years ago into Snapchat. That stake is now worth $24 million. Not a bad investment for a group of high school students. Read More

Oil was down this week, decreasing 1.5% to close at $53.21/barrel. The yield on the 10-yr Treasury increased sharply, closing at 2.49%, from 2.32% a week ago. The average rate on a 30-yr mortgage moved lower to 4.10% from 4.16% last week.

Close Weekly YTD
Dow Jones 21,005.71 0.9% 6.3%
S&P 500 2,383.12 0.7% 6.4%
Oil 53.21 (1.5%) (1.3%)
10-yr Treasury (∆ in bps) 2.49 17 4

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