Content provided by Rusty Vanneman, CFA, CLS Chief Investment Officer
There has been a lot of talk about “austerity” lately, especially given all the discussion on the Reinhardt and Rogoff (R&R) study. Yet government spending is still 24 percent of GDP (while that is below the 25 percent plus, from a few years ago, it is well above the 66-year average of 20 percent). And tax revenue, while at 17 percent of GDP is still below the long-term average of 18 percent. In sum, that doesn’t exactly sound like austerity to me. These numbers are NOT because GDP collapsed either, given that GDP is at all-time highs. While I believe the very recent trend in fiscal policy is in the right direction, I would not qualify current policy as austere, but still as very loose.
What might this mean for the stock market? In this case, we may have a good story on our hands. Government spending as a percentage of GDP is usually on the decline during secular bull markets while it typically increases during secular bear markets. Given the recent trend, could this be another clue that the secular bear is over?