US Stock Market: Time Lag in Policy Effects
2024-12-04
■ The federal debt ceiling will be restored in early 2025, which may become a constraint on the expansion of the fiscal deficit
■ There is a time lag in the policy effect, and the rise in US Treasury yields may become a pressure on the US stock market in the first half of next year
According to the estimates of the Committee for a Responsible Federal Budget (CRFB) (base scenario), the impact of the Republican Party's tax cuts and social security payments on fiscal deterioration is as high as $10.4 trillion, while the scale of compensation through measures such as raising tariffs is $3.7 trillion. The fiscal deficit will expand to $7.75 trillion if interest expenses are added. Although the range of estimates for expanding the fiscal deficit is large (from $1.65 trillion to $15.55 trillion), large-scale Treasury bond issuance will be inevitable to achieve policy goals.
As a result, the federal debt ceiling issue will again become the focus. Although the debt ceiling has been temporarily suspended due to the passage of the Fiscal Responsibility Act in June 2023, the debt ceiling will be restored from January 1, 2025. The current statutory ceiling is $31.4 trillion, and as of November 2024, the outstanding debt has exceeded $35 trillion. Without raising the debt ceiling or restructuring the moratorium mechanism, there will be no talk of further expansion of the fiscal deficit. Since the new Senate has a Republican majority, there is a view that the debt ceiling can be raised through fiscal coordination measures, but changes to social security require the same 60 votes as regular bills. In addition, the presence of conservative hardliners in the House of Representatives who advocate spending cuts may force a cross-party consensus, increasing the risk of reducing fiscal spending.
Policies such as raising tariffs and restricting immigration are expected to be implemented quickly through presidential executive orders without waiting for the budget to be passed. Therefore, the effects of these policies are expected to be seen first. After the next president takes office on January 20, 2025, rising inflation expectations and concerns about the expansion of the fiscal deficit may cause U.S. Treasury yields to remain high, putting pressure on stock prices. The fiscal 2026 budget report is expected to be released around February 2025, and it will include the fiscal policy framework of the following U.S. government, such as tax reform. Subsequently, during the budget discussion for fiscal year 2026 (starting in October 2025), market expectations of policy effects may influence stock market performance. If market expectations for implementing policies such as special depreciation for equipment investment and corporate tax cuts increase, the US stock market may see upward momentum from the second half of next year.
■ There is a time lag in the policy effect, and the rise in US Treasury yields may become a pressure on the US stock market in the first half of next year
According to the estimates of the Committee for a Responsible Federal Budget (CRFB) (base scenario), the impact of the Republican Party's tax cuts and social security payments on fiscal deterioration is as high as $10.4 trillion, while the scale of compensation through measures such as raising tariffs is $3.7 trillion. The fiscal deficit will expand to $7.75 trillion if interest expenses are added. Although the range of estimates for expanding the fiscal deficit is large (from $1.65 trillion to $15.55 trillion), large-scale Treasury bond issuance will be inevitable to achieve policy goals.
As a result, the federal debt ceiling issue will again become the focus. Although the debt ceiling has been temporarily suspended due to the passage of the Fiscal Responsibility Act in June 2023, the debt ceiling will be restored from January 1, 2025. The current statutory ceiling is $31.4 trillion, and as of November 2024, the outstanding debt has exceeded $35 trillion. Without raising the debt ceiling or restructuring the moratorium mechanism, there will be no talk of further expansion of the fiscal deficit. Since the new Senate has a Republican majority, there is a view that the debt ceiling can be raised through fiscal coordination measures, but changes to social security require the same 60 votes as regular bills. In addition, the presence of conservative hardliners in the House of Representatives who advocate spending cuts may force a cross-party consensus, increasing the risk of reducing fiscal spending.
Policies such as raising tariffs and restricting immigration are expected to be implemented quickly through presidential executive orders without waiting for the budget to be passed. Therefore, the effects of these policies are expected to be seen first. After the next president takes office on January 20, 2025, rising inflation expectations and concerns about the expansion of the fiscal deficit may cause U.S. Treasury yields to remain high, putting pressure on stock prices. The fiscal 2026 budget report is expected to be released around February 2025, and it will include the fiscal policy framework of the following U.S. government, such as tax reform. Subsequently, during the budget discussion for fiscal year 2026 (starting in October 2025), market expectations of policy effects may influence stock market performance. If market expectations for implementing policies such as special depreciation for equipment investment and corporate tax cuts increase, the US stock market may see upward momentum from the second half of next year.