Those are always comforting words when flying. The pilot will usually follow up with a comment about turning off the seatbelt light and telling passengers they are free to move about the cabin. There is usually a safety recommendation to keep the seatbelt fastened while seated. In the stock and bond markets it feels like we have reached our cruising altitude, but we advise that you keep your seatbelts fastened in case we hit some unexpected turbulence.

In April, the stock market leveled off at a comfortable altitude. A French preliminary election and a new round of quarterly corporate earnings brought us back to the 21,000 level on the Dow Jones Industrial Average. All the noise regarding Syria, North Korea, trade wars, walls, immigration, tax cuts, Obamacare, and shutting down the federal government can be a distraction to what really matters: corporate earnings. Thankfully, the market has not lost its focus. Strong earnings from McDonald’s, Alcoa, Caterpillar, and DuPont were welcome news and signaled that another quarter of solid earnings is on the way. The technology sector fueled the Nasdaq Composite to breach the 6,000 milestone with Facebook, Netflix and Google (now Alphabet) reaching records highs. International stocks are back in play as the news from France ignited a rally overseas. At the end of the month, it was the international developed stock group taking home the first place trophy with a return of 2.54% followed closely by the NASDAQ Composite and emerging market stocks with monthly returns of 2.35% and 2.19%, respectively.

Since our elections last fall, the market has moved steadily higher with volatility nearing record lows. This is not uncommon as a smooth ride keeps investors comfortable. This feeling of calm will not last forever, but take the time to enjoy it. Graphically, this 10-year chart of volatility speaks volumes about the underlying positive tone in the market:

The bond market continues to befuddle experts as interest rates appear to have a mind of their own. The 10-year U.S. Treasury Note traded in a range of 2.4% to 2.2% during April and finished the month yielding 2.3%. There are some interesting dynamics at work in both the U.S. and international bonds markets. Interest rates throughout the developed world are low and continue to remain low. In the U.S., we tend to compare the yield of the 10-year U.S. Treasury Note to where it’s been over the past 10-15 years, and we can accurately state that our interest rates are low. When you take the next step and compare our 2.3% yield on 10-year to Germany at 0.3% or France at 0.8% or Japan at 0.0%, you begin to realize our interest rates are quite attractive in a global sense. While the consensus is for higher interest rates in the U.S., getting there will be slowed by global factors destined to keep interest rates low.

Stay positive with your investment program and enjoy the ride. Asset prices will correct at some point in the future, but for the present time we are in a sweet spot of positive corporate earnings, low interest rates and low volatility.

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Since the lows of 2009, the U.S. stock market (S&P 500) has tripled as the economy and corporate profits have recovered. The federal debt levels of the U.S. government have almost doubled in the same time period. Federal debt outstanding has moved from roughly $10 trillion at the depth of the financial crisis to almost $20 trillion today.

See the chart below illustrating the moves in both the stock market and the federal debt:

Federal debt increases are the subject of immense media sensationalism, political grandstanding, and investor anxiety. How did the debt increase so much? It’s largely in response to the imploding economy during the financial crisis of 2008-2009. Debt increases are a function of the government not being able to pay its bills. Too little revenue (taxes) compared to costs (spending) equals budget deficits. Ever since 2001 the federal government has been running annual deficits, in fact they rarely show a surplus. See the chart below illustrating annual surpluses and deficits:

As an investor, should I be concerned about the ever increasing levels of debt at the federal level? The answer is really yes and no. We certainly don’t want to see federal debt doubling every 8 years, but I would focus less on the actual debt number and more on the our government’s ability to service (pay the interest) on its debt. When we look at our ability to service the debt, a less alarming picture presents itself. There are a couple of things to take into consideration when discussing debt service.

First, what is the interest rate our government is paying on its outstanding debt? Before the financial crisis, rates on federal debt was close to 5%. Today it’s down, closer to 2%. When rates are lower, the government can carry more debt and keep debt servicing amounts level. See the chart below:

Secondly, I think it’s worthwhile to look at government debt interest payments as a percentage of our economy (GDP). Federal debt servicing costs as a percentage of GDP are at normalized historical levels. In fact, debt service was at much more alarming levels in the 1980’s and 1990’s when interest rates were much higher and defense spending was being ramped up, as seen in the chart below:

A few other things to consider on the topic:

• The entirety of the $20 trillion obligation never really comes due, it’s simply rolled over (much as corporate America does).
• If the global investing collective was concerned about the ability of the U.S. government to service its debt, I’d expect U.S. interest rates to skyrocket and the U.S. dollar to become very weak. Currently the exact opposite is occurring.
• Federal income tax revenue has also increased as our economy has grown over the years, offsetting increased debt obligations.

We know the media and politicians hype the absolute amount of Federal debt, but hopefully the last two charts on debt servicing levels puts your mind at ease on the matter. Remember, when we discuss federal debt we’re really talking about the full faith and credit of the U.S. government and its ability to pay and service its debt.

Currently investors and rating agencies around the world are comfortable with our ability to pay and service our federal debt. In fact, investors worldwide tend to feel U.S. government Treasury bills, notes, and bonds are a safe haven in the global fixed income marketplace.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222