Auburn University finance professor comments on record-high stock market, federal spending and the deficit

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Dr. John Jahera, the Bobby Lowder Professor of Finance in Auburn University’s Harbert College of Business, comments on the record-high stock market hitting 27,000, federal spending and the deficit.

How does the increasing deficit affect the stock market in the long term?

To put it in simple terms, there is only so much money available to fund the operations of the government and to meet the funding needs of the business sector. So continuing with ever larger deficits means less money for the business sector of the U.S. and, typically, one would expect to see a rise in interest rates. However, the current economy has seen rising deficits but yet interest rates have remained historically low. Nonetheless, many are concerned about the size of the deficit and the increasing trend. Clearly, the stock market in the last two years has performed exceedingly well with records highs. Unemployment is at historic lows so the economy overall is highly productive right now.

Does the record stock market alleviate concerns about the deficit?

The record stock market does alleviate some concerns about the deficit but not totally. In fact, if one goes back in time and looks at the historical data, periods of high deficits are not necessarily followed by market declines. Likewise, a budget surplus does not lead always to a boom market. If we look back to 1999 when we had a federal budget surplus, the next few years saw market declines. So to say that deficits are always bad is simply not correct.

How do the stock market, federal spending and deficit affect the average person?

We can look at each of these separately even though they interact to some extent. In terms of the stock market, slightly more than half of the population owns some stock either directly or indirectly through a pension plan.

So a booming stock market benefits a large number of people in the U.S. People find their 401(k) balances increasing and distributions go up so they spend more, further driving economic growth. So a rising stock market is great for people in the U.S. Federal spending can of course directly benefit those who are beneficiaries of various government programs. The federal government uses financial incentives to drive certain behaviors. For instance, if we wish to promote higher levels of home ownership, the government may increase funding for government guaranteed mortgage loans. As for the deficit, one would expect to see interest rates rise and that can certainly impact the average person. Of course, higher rates bring some winners and some losers. When rates are higher, those who are savers benefit while those who are borrowers lose.

Is there anything that might surprise many economists or analysts?

Many remain surprised that interest rates have remained so low for so long particularly with the economy being so strong. Of course, many economists were predicting a market downturn several years ago but that has yet to materialize. Right now, the question is how much longer can the market boom last? We know that markets move in cycles and we will have a downturn at some point in time. When is the question.

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