Recently, the S&P 500 (SPY) returned to its 2007 level of 1,500, and cheers filled the room. Nothing can get an investor more excited than a bull market. The S&P has gained over 20% since June 2012, and many feel getting over the 1500 resistance point is a major factor in it continuing to climb. I, for one, do not believe in massive climbs without pullbacks at some point, as I have written about many times.
I want to compare where we are as a country today and where we were in 2007. These are facts that are major points in the health of our country, and our economy which, of course, do impact how our markets perform. I believe these factors signal the end of the rise and a potential pullback on the horizon.
This seems to be a very popular topic these days. Should we raise the debt ceiling and if so, should there be cuts to our budget in conjunction with it? Should we force the Senate to pass a budget in exchange for increasing it? See below, which shows where we were in 2007 as compared to today.
In 2007, our debt ceiling was about $10 trillion dollars. Although this graph does not show our current ceiling (currently, we have a combined government and public debt of $16.432 trillion dollars), we theoretically have already surpassed this with no cap increase. Without a cap increase, we could fall into default, which on its own merits would sink the prices in the market today. This shows our current debt has nearly doubled since 2007. As a country, we continue to spend what we do not have, and this becomes more striking when you compare our debt to our GDP below.
Debt Vs. GDP:
In 2007, our debt % vs. GDP was a manageable 58%. The projected numbers show our total debt reaching the 100% mark sometime in 2013. Our GDP will be equal (if you can believe it) to the total debt we owe! This does not make for a healthy country, which in turn raises the possibility of many factors that could not only stop this ascent dead in its tracks, but send it freefalling, as it did in 2008.
A default, of course, would probably be the most catastrophic result, but all of this uncertainty over the ceiling and the budget causes many companies to pause. Without knowing how things will look, companies hold off on decisions to hire new employees, invest in capital purchases and so on. This of course can have a potential negative impact on the economy at a time when our economy needs to be growing to offset the debts we have. Our spending and lack of action in terms of balancing our budget is now catching up to us very rapidly.
Assuming we had less debt, the above graph would show a nice increase of over $500 billion dollars to our Gross Domestic Product (GDP), which would actually be a positive. The fact is, although we produced over $15 trillion last year, which is about 10% above the levels of 2007, our debt is nearly double of what it was back then. Our GDP has not grown to keep pace with our spending, hence we continue to fall further backwards. Do not forget about inflation as well, this number is basically only keeping up with it compared to 2007 (based on a 2.5% per year). If this number was much higher (which in turn would keep the Debt vs. GDP a manageable number) there would be less concern.
These three technical aspects present a "perfect storm" for a major meltdown in stock prices, not to mention that the S&P and Dow are up over 20% in the last 6 months with no major rhyme or reason for it. Our country is nowhere near where it was health-wise in 2007, we have increased debt, only similar GDP and more spending than ever before.
The stock market is based on many factors on a day to day basis. Popularity can drive a stock through the roof (such as Apple (AAPL), which was very popular and has since come crashing back to earth with numbers showing poorly). But at the end of the day, most of the time, technical factors and quite frankly math, usually win out and will rectify any misconceptions rather quickly (and sometimes painfully).
The numbers here do not lie, I believe we are in line for a major pullback overall in the market. The overall uncertainty of whether or not the debt ceiling will (or should be) raised, the amount of debt we currently have (and are adding to), and the fact that our GDP has not grown to offset the debt makes this a serious possibility. The question is more likely not will it happen, but more like, when will it happen?