You can bet on anything these days. If you’re feeling lucky, the over/under on the government shutdown is 13 days.1 Those are the odds on Kalshi and that would make it the 5th-longest government shutdown in history. For fans of limited government and reduced spending, this sounds like a wonderful development. Normally I’d agree, but I’m unlucky enough to have scheduled a family trip to DC in two weeks, so 13 days is cutting it a little too close for hotel cancellations. Oh well, Dollywood’s nice this time of year, right?
And I was so looking forward to the totally jaded, disillusioned Washington, DC tour I was going to conduct for the kids:
“Welcome, my children! Welcome to the Heart of Darkness!! I’ll be your cynical tour guide this week. This may be the last time you visit where the museum placards are in English instead of Chinese, so read them all while you can! Here’s the Capitol of Insider Trading, where you marry a venture capitalist and get yourself on a real nice committee full of inside information. Here’s the Bureau of Printing and Engraving: if you buy a sheet of dollar bills when you enter, by the time you leave, they’ll have to issue you a refund for the amount the dollars have dropped in value during your visit! Here atop the Washington Monument, you can really get a sense of the collective stench of the city rising to fill your nostrils.”
Maybe it’s better for the kids we go to Dollywood, huh?
But this fight on Capitol Hill is actually one worth having. The magnitude of the challenge to balance the budget leaps off the screen when looking at The CBO’s graph of “The Federal Budget in Fiscal Year 2024.”2 The government’s total expenses are $6.8 trillion. Of that total, mandatory expenses (which are not part of the discussion related to the shutdown) are $4.1 trillion. Those include Social Security ($1.5 trillion), Medicare ($865 billion), Medicaid ($618 billion), income security programs ($370 billion) and “other (don’t you love that?)” ($752 billion). The total revenues to the government were $4.9 trillion in 2024 from individual income taxes, payroll taxes, corporate income taxes and “other.” It’s the Discretionary category that is the subject of the fight. Defense spending actually falls into that, believe it or not, and accounts for $850 billion. Nondefense discretionary spending is where the fight centers, and it accounts for $960 billion. Think of it this way, if you add Defense spending to the Mandatory spending line (and I’m inclined to think that’s the way it should be anyhow), you are already $50 billion over the revenues the government took in in 2024. But then you can’t pay the net interest on the debt of $881 billion, nor have any nondefense spending. For politicians enamored with the Washington gravy train, that’s a nonstarter. Ray Dalio has even commented that there’s no appetite in Washington to change any of that. He said the politicians recognize the problem but don’t have the collective willpower to solve it.
While the nation’s treasury is starting look like Atlas holding up the weight of a world of debt for the foreseeable future, stock market valuations are stretched like a taut rubber band loaded on a rubber band gun. The CAPE ratio, one that is used to determine the valuation of the S&P 500, is over 40. To give some context, at no other time in history, except for many months during 1999 and the year 2000, was the market valued that highly. That, of course, was the time preceding a 50% drop in the S&P. From a price-to-sales standpoint the S&P 500 is trading the highest valuation in history, at over 3.3 times sales. We’re not trying to scare you, but we always want to be transparent with this column. If you read last week’s WTA Market Mindset, you’ll know that there is solid data on both the bull and bear case in several different aspects of the economy and the market. It could still go either way: but risks are increasing.
There are some undercurrents that are a little vexing, you might call them an undertow (or Under Toad if you are a “World According to Garp” fan). One little detail is that searches for “second job” have reached an all-time high. Another is that the US bond market has now been in a drawdown for 62 months, which is the longest stretch in history by a, well, long stretch. It’s only really when you take a step back and let your vision blur when looking at this “magic eye poster” can you really see what’s happening:
- Stocks: all-time high
- Home Prices: all-time high
- Bitcoin: all-time high
- Gold: all-time high
- Money Supply: all-time high
- National Debt: all-time high
What is the common denominator in all of this? The value of the dollar, or lack thereof, has vaulted prices and valuations in all of the above to their zeniths. The US Dollar Index is down 10% year to date3, and the takeaway should be this: you need to be in assets or you are giving up too much purchasing power (per your risk tolerance, goals and time horizon, of course).
Consider this for a moment. According to Bloomberg here are the S&P 500 all-time highs by decade:
1950s: 137
1960s: 218
1970s: 35
1980s: 189
1990s: 310
2000s: 13
2010s: 242
2020s: 104 (through March 2024).
In all that’s 1,250 all-time highs for the S&P 500 as it’s made its way to its current valuation. It’s an average of 16 each year. So, you want to exit at an all-time high? Makes sense to the buy-low-sell-high mantra, right? What if that all-time high that caused you to take the exit ramp was in the 80s? Or even in the 2010s? How many opportunities at wealth would you have sacrificed? Everyone’s wealth equation changes as you get older and your risk-reward factors change. But if there is weakness in the dollar, the aforementioned Ray Dalio would tell you that’s GREAT for stocks and commodities. As the value of the dollar drops, it’s easier to make your earnings estimates at publicly traded companies as it becomes easier to sell goods abroad, which feed into greater valuations and stock prices. A weak dollar also helps potentially pay back the national debt which can, in a sense, be inflated away slowly (hopefully not quickly …). A weak dollar also means the more conservatively you invest, the worse your safely invested money performs against the real rate of inflation and against the S&P 500 as your family finances ride the decline of the dollar. It has cost roughly 8% over the average one-year period to hold cash versus investing in the S&P 5004. Over 5 years it costs 54%. Over 10 years 159%. 20 years? 701%. Ouch. The moral of the historical data story is this: own assets or be left behind. (This is all based on the history of the index. Of course past performance is no guarantee of future results, even for the storied S&P 500. Choosing what assets to own is complicated and sometimes delicate, which is why we offer a variety of strategies for different risk tolerances.)
Your time horizon is one of two things: the end of your life or the end of your beneficiaries’ lives depending on the purpose of your money – whether you intend to use it all or have some of it pass on to them. Your time horizon is not your retirement date. It is not the start of your social security (which, by the way, won’t at all be affected by the shutdown as it falls into mandatory spending). To overcome inflation and the decline of the dollar over any time frame longer than 5 years, investing in the market is an important consideration. Thinking about the number of all-time highs above in the various decades may ease your mind about being at an all-time high in the market. If not, give us a call and let’s have a chat. If you listen to us, we’ll change your financial world …
Sincerely,
Scott Wright
Portfolio Manager
The Wealth Training Academy
Sources:
2 The Federal Budget in Fiscal Year 2024: An Infographic | Congressional Budget Office
3DXY | U.S. Dollar Index (DXY) Overview | MarketWatch
4@charliebilello
