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Michael Frost

Headwind for the US Markets?

| February 23, 2021

Headwind for the US Markets?


In an article written by Sam Potter for Bloomberg entitled, “Everything Wall Street Predicts for 2021,” dated January 3rd, 2021, Vanguard said that factoring in lower expectations for global growth, inflation, and interest rates, the annualized return for the U.S. equity market over the next 10 years is in the 3.5%-5.5% range.  That is a lot different from what we have received over the last 10 years. Let us look at what maybe headwinds for the markets here in the US going forward.


  1. U.S. companies owe more than $10 trillion, which is nearly half of the country's 2019 GDP of $21.5 trillion. Taking other forms of business debt into consideration, including partnerships and small businesses, that figure stands at an eye-watering $17 trillion, the Financial Times reported earlier this month.

  2. Corporate buybacks might stop. That would be a huge headwind.  There was a remarkably interesting article on the Bloomberg website entitled, “Goldman Considers ‘A World Without Buybacks.’ It Looks Ominous”, by Lu Wang, dated April 8, 2019.  Many people believe that the US stock market is up because individuals and pensions and mutual funds keep buying. That is not the case.  The article starts out saying, with political scrutiny of stock buybacks growing, Goldman Sachs started assessing an extreme scenario: “a world without buybacks.” The picture does not look pretty.  That is because corporate demand has far exceeded that from all other investors combined, according to strategists led by David Kostin. Since 2010, net buybacks averaged $420 billion annually, while buying from households, mutual funds, pension funds and foreign investors was less than $10 billion for each, Federal Reserve data compiled by Goldman showed.

  3. Tax Increases. An article written by Darla Mercado on CNBC dated July 21, 2020 titled, “Here’s what a Biden presidency might mean for your taxes,” explains some of the proposed tax increases that might come in the next couple of years.

    Increase in personal income tax.

    Increasing corporate tax rates.

    Increasing capital gains tax from 15% to 39% or ordinary income.

    Elimination of the step up in basis for estates.

Think of what this might mean. Any one of these would be a significant headwind but all these together could be a real problem. Especially if people are sitting on a highly appreciated asset where they would only pay 15% capital gain and now all the sudden that tax goes to 39%.  There is the possibility that people would sell before that tax rule checked in.

  1. The US market is way overvalued by Warren Buffets targets. As pointed by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.”  This is what it looks like today.

We are currently at the highest valuation ever recorded. This does not seem to be a good thing going forward. Part of the reason we are here is because of all the debt that the government and the corporations have accumulated. Can we go higher over the next 10 years?

  1. Our demographics do not look good. We will lose a lot of working age people in the next 20 years.  Here is a graph from Hartford Funds.  By 2025, there will be about 4.5 billion workers in emerging markets versus 800 million workers in developed markets.  And those numbers will increase for emerging markets and decrease for developed markets. It is an easy mathematical equation to see where the growth is going to come from.



The US debt is Huge!  In fact, if you look at everything, it is much worse than what you would think. Here are some facts from the company Just Facts. Look at the graph below.

* In May 2020, the national debt reached 120% of the nation’s annual economic output, breaking a record set in 1946 for the highest level in U.S. history. The previous high of 118% stemmed from World War II, the deadliest and most widespread conflict in world history * At the close of its 2019 fiscal year, the federal government had accrued roughly:

  • $10.1 trillion ($10,084,000,000,000) in liabilities that are not accounted for in its publicly held national debt, such as federal employee retirement benefits, accounts payable, and environmental/disposal liabilities.

  • $35.2 trillion ($35,205,000,000,000) in unfunded obligations for current Social Security participants.

  • $42.3 trillion ($42,300,000,000,000) in unfunded obligations for current Medicare participants.

* Balanced against the value of its commercial assets, the federal government had a combined total of $103.7 trillion ($103,658,000,000,000) in debts, liabilities, and unfunded obligations at the close of its 2019 fiscal year. This shortfall amounts to:

  • $315,315 for every person living in the U.S.

  • $806,181 for every household in the U.S. 4.8 times the size of annual U.S. economic output.

  • 29 times annual federal revenues.

  • 91% of the combined net worth of all U.S. households and nonprofit organizations, including all assets in savings, real estate, corporate stocks, private businesses, and consumer durable goods such as automobiles and furniture.

Your portion is $315,315! 

There is a huge conundrum here because The United States owes over 100 trillion dollars and only takes in 3.8 trillion.  Your banker would not like those numbers!

In conclusion, maybe we could deal with one or two of these problems at a time, but we have never had to deal with all of these at once and especially at the extremes that they are at. It will certainly be a challenge. The good news is though that the rest of the world does not all look like the United States.

The opinions voiced in this material are for general information and are not intended to provide specific advice or recommendations for any individual.

All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

All investing, including stocks, involves risk including loss of principal.

The Wilshire 5000 Total Market Index, Which consist of more than 5000 companies, represents virtually all of the capitalization of the entire US stock market.