Is Government the Problem?
By Adam Baley
Many people emphatically blame the government for turbulence in the economy and the stock market. Independent of political leaning, many people share a distrust in the political system.
The Pew Research Center has reported that its surveys indicate “a perfect storm of conditions associated with distrust of government.”
Don’t let your political frustration discourage you from investing. When it comes to the economy and your investments, the government has very little long-term impact.
The best measure of the U.S. economy is Gross Domestic Product (GDP) the total output of the nation’s goods and services.
Roughly speaking, 70% of the economy is generated by consumers. Every time we buy groceries, a new car or replace a broken appliance, we contribute to the GDP.
Business spending adds another 20% – for example, when your grocery store replaces old shopping carts with new ones.
It’s only the remaining 10% of GDP that is influenced by government spending. While 90% of GDP is driven unrelated to government spending, it’s that last 10% that so many want to pick on.
During the recent recession, when consumers were unable to spend and businesses were unwilling to commit idle cash, the government stepped in to try to stimulate the spending necessary to keep the economy going.
The government’s spending choices – ranging from industry bailouts to extended unemployment benefits to tax credits for buying homes and cars – may be up for debate. But the government plays a role in the economy. The Employment Act of 1946 makes it the federal government’s responsibility “to promote maximum employment, production and purchasing power.”
While government spending generally has raised concerns about deficits and inflation, a low yield on the 10-year Treasury note lately has suggested that large investors globally haven’t lacked confidence in the U.S. government.
Have you ever stood in the grocery store checkout line and said to yourself, “I don’t feel like buying food this week because I am unhappy with the government?” Probably not.
When it comes to your investments, it really comes down to two factors: interest rates and corporate earnings.
Currently, interest rates are low, which is good for the market. This environment allows corporations and homeowners to borrow at manageable interest rates.
While interest rates look to remain low for some time, corporate profits are forecast to go much higher, returning to pre-crash levels.
Economists expect the annual earnings per share (EPS) of the Standard & Poor’s 500 index to reach $80 by year-end. Looking into 2012, economists expect the S&P earnings to be between $90- $100 per share, back to historical highs.
A low interest rate environment and a strengthening corporate America can lead to a healthier tomorrow.
When it comes to the economy and your investments, you are in the driver’s seat. Don’t let your frustration with the government override sound financial decisions for you and your family.
Adam Baley is an investment advisor at Landaas & Company.
initially posted July 7, 2010 (updated April 13, 2015)