McClellan Chart In Focus: Treasury Department Is Not Biting Too Hard – By Tom McClellan

Chart In Focus

The good news for the stock market bulls is that the federal government is not taking too big of a bite out of Americans’ incomes.  The latest data from the Treasury Department show that total federal receipts from all sources for the 12 months ending September 2019 amounted to 16% of GDP.  That still seems like a pretty high percentage empirically, but it is below the average of the past 4 decades.

This week’s chart compares that measure of the tax bite to the movements of the SP500.  The important lesson is that pushing taxes up too high tends to cause recessions and bear markets, eventually leading to a falloff in total tax receipts.  Generally speaking, 18% qualifies as “too high” because we have seen a recession every time it has gone up there.  Even getting close to 18%, as we saw in 2007 and 2016, can lead to economic distress.

But lower readings like we see now tend to be followed by months or years of uptrend for stock prices.  More money gets left in the hands of taxpayers, and so they can do things like bid up stock prices with it. 

The problem is that taking in 16% of GDP in taxes does not pay the bills.  The last 12 months’ expenditures by the federal government amounted to 20.6% of GDP.

Federal receipts and spending per GDP

For FY2019, which ended in September, total raw dollar receipts were up 4.0%, which is pretty good.  But total raw dollar expenditures were up 8.2%, because our elected leaders in Washington, D.C. cannot get control of their spending impulses.  It is a spending problem, not a taxing problem.  And it does not help that Baby Boomers are entering retirement and starting to draw Social Security and Medicare in larger numbers than the older generations are dying off.  So we have a spending problem, and an actuarial problem, but not a taxing problem.

And those problems are really only a concern to those of us who don’t want to leave a mountain of debt to our grandchildren.  For investors, a deficit like that is an enormously stimulative force for the stock market.  Here is that comparison:

Federal deficit vs. SP500

The higher the deficit now, the more bullish it is for the months that follow.  Deficits only become a problem for the stock market at the point when somebody tries to do something about it.  But while they are at a high level and climbing, it is reminiscent of the old saying, “A fool and his money… are some party!!

Tom McClellan
Editor, The McClellan Market Report

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About the author

Sherman and Marian's son Tom McClellan has done extensive analytical spreadsheet development for the stock and commodities markets, including the synthesizing of the four-year Presidential Cycle Pattern. He has fine tuned the rules for interrelationships between financial markets to provide leading indications for important market and economic data. Tom is a graduate of the U.S. Military Academy at West Point where he studied aerospace engineering, and he served as an Army helicopter pilot for 11 years. He began his own study of market technical analysis while still in the Army, and discovered ways to expand the use of his parents' indicators to forecast future market turning points. Tom views the movements of prices in the financial market through the eyes of an engineer, which allows him to focus on what the data really say rather than interpreting events according to the same "conventional wisdom" used by other analysts. In 1993, he left the Army to join his father in pursuing a new career doing this type of analysis. Tom and Sherman spent the next 2 years refining their analysis techniques and laying groundwork. In April 1995 they launched their newsletter, The McClellan Market Report, an 8 page report covering the stock, bond, and gold markets, which is published twice a month. They utilize the unique indicators they have developed to present their view of the market's structure as well as their forecasts for future trend direction and the timing of turning points. A Daily Edition was added in February 1998 to give subscribers daily updates on their indicators and also provide market position indications for stocks, bonds and gold. Their subscribers range from individual investors to professional fund managers. Tom serves as editor of both publications, and runs the newsletter business from its location in Lakewood, WA.