Isn’t deficit spending actually a stimulant for the economy? Even if it isn’t prudent, and left unchecked inflationary? Wouldn’t a significant reduction in govt spending actually be bad for equities.
You are correct in the short term, deficit spending is classic Keynesian stimulus. The long term on deficits is that sooner or latter you have to choose between guns, butter, and servicing the debt.
“Isn’t deficit spending actually a stimulant for the economy? Even if it isn’t prudent, and left unchecked inflationary? Wouldn’t a significant reduction in govt spending actually be bad for equities.”
That’s an excellent point/question. It *can* be...within limits. The US “economy” (and no two people have identical definitions for “the economy”; is it...unemployment? Corporate profits? the velocity of money? Ease of borrowing/availability of credit? Soundness of corporate or municipal credit? Some combination?) has built in expectations as to those factors. The economy has been addicted to very cheap money now for a decade; it is clear that the Fed now intends to raise rates, so whatever it is that is happening now, it would appear to be >>a course change for whatever has gone on for a decade.<< And what has gone on for a decade has been a relentlessly rising stock market.
It is not so much that deficit spending is good or bad for “the economy” and thus for stocks; it is the continuation of the good times or a tightening of credit, perhaps accompanied by a shrinking money supply. An oversupply of government spending is bound to be inflationary at some point and IMO, this what the market is seeing now. In particular, I believe the market is fearing rising wages and has at these high market levels already encompassed the tax cut pump. Wage rises are generally disdained, because they are very very sticky, and they infect the whole economy. They are reminiscent of the 70’s when workers demanded higher wages based upon the inflation they saw usually blamed upon the deficit spending for the VietNam war. The result was a market that went almost nowhere for quite a while and a sluggish economy. While the media (when it is not preoccupied bashing Trump) is touting a growing economy and still thinks that inflation will be kept in check like it has, unbelievably, for a decade, my thinking is that the market does not believe that.
Additionally, very recently, bonds have been hammered, which is a ratification or evidence that inflation is going to commence in earnest. But the Fed has GOT to get people to buy bonds, and one of the ways they force people into bonds even when they look like pure garbage is to crash the market so people run to perceived safety.