Political Calculations
Unexpectedly Intriguing!
August 20, 2019

Every three months, we take a snapshot of the expectations for future earnings in the S&P 500 at approximately the midpoint of the current quarter, shortly after most U.S. firms have announced their previous quarter's earnings.

The earnings outlook for the S&P 500 has weakened since our Spring 2019 edition. The projected trailing year earnings per share for the index in December 2019 has fallen from the $150.96 forecast three months earlier to $146.63 this month.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 2014-2020, Snapshot on 15 August 2019

The oddest thing about this chart is the projected boost to earnings for 2019-Q4. We don't know any reason why Standard & Poor's trailing year earnings is so optimistic in this quarter after deflating so much in the quarters preceding it.

Looking at that optimism even further out, expected earnings for the S&P 500 at the end of 2020 have also weakened, but by a smaller amount, falling from $167.97 to $166.51 per share, where S&P is projecting a sharply upward trajectory.

You can see in the chart how those projections turned out during 2018 and 2019. These will almost certainly be revised downward, sharply, in upcoming quarters.

Data Source

Silverblatt, Howard. Standard & Poor. S&P 500 Earnings and Estimates. [Excel Spreadsheet]. 15 August 2019. Accessed 16 August 2019.

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August 19, 2019

For a week where the full U.S. Treasury yield curve inverted as stock prices were quite volatile, the week didn't end all that much differently than the previous week did.

By the end of the week, the S&P 500 (Index: SPX) was about one percentage point lower than a week earlier, as investors continued splitting their forward-looking attention betweeen 2019-Q4 and 2020-Q1. And while investors flirted with focusing more closely on 2019-Q4 during the week, there wasn't enough in the news to shift it more fully onto that particular point of time in the future.

Alternative Futures - S&P 500 - 2019Q3 - Standard Model - Snapshot on 16 Aug 2019

At this point, investors are betting the Federal Reserve will be forced to act aggressively to cut short term interest rates in a bid to revert the yield curve, with the CME Group's FedWatch Tool now projecting as many as four quarter point rate cuts in the four quarters ahead:

CME Group FedWatch Tool Probabilities of Federal Funds Rate Changing at Future FOMC Meeting Dates, Snapshot on 16 August 2019

We think the uncertainty of the timing of rate cuts between 2019-Q4 and 2020-Q1 is what is holding investors' attention on these two future quarters for now, but the potential deterioration of economic circumstances that would lead to the increased probability of rate cuts extending into 2020-Q2 could spark a much more negative reaction in stock prices should investors have reason to really focus on that particular future quarter.

There's also the potential that changes in the expectations for dividends in any of these upcoming quarters will have an impact on stock prices as well. Fortunately, dividend futures have so far been largely stable, where much of the outsized volatility we've seen may be attributed to investors shifting their time horizons in setting their expectations.

That's why we make a point of tracking the market moving headlines each week, which we've presented below. The random onset of new information plays a large role in setting the forward-looking focus of investors.

Monday, 12 August 2019
Tuesday, 13 August 2019
Wednesday, 14 August 2019
Thursday, 15 August 2019
Friday, 16 August 2019

Looking for the bigger picture of the week's news than the headlines we've noted above? Barry Ritholtz lists seven positives and only five negatives in the week's economics and market-related news.

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August 16, 2019

The U.S. Treasury Department has revised its estimates of the amount of money the U.S. government owed to various foreign countries, which allows us to finalize the data for the government's fiscal 2018 for which we had presented preliminary figures earlier this year.

From the end of its 2017 fiscal year to the end of its 2018 fiscal year, the U.S. government's total public debt outstanding increased by $1,271 billion, or $1.3 trillion, to reach a total of $21,516 billion, or $21.5 trillion. Put a little bit differently, the U.S. national debt grew at an average rate of nearly $3.5 billion per day on every day of the government's 2018 fiscal year.

That's a very large number, but 2018 was only the sixth largest annual increase for the U.S. national debt in terms of nominal U.S. dollars. Larger increases were recorded during President Obama's tenure in office in 2012 ($1,276 billion), 2010 ($1,294 billion), 2011 ($1,300 billion), 2009 ($1,413 billion), and 2016 ($1,423 billion).

So it's not an accident that the U.S. national debt has risen to $21.5 trillion, where these six years combined account for 37% of the official U.S. national debt. But to whom does the U.S. government all that money?

The following chart breaks down who the U.S. government's major creditors were at the end of its 2018 fiscal year, which is based on preliminary data that will be revised in upcoming months.

FY 2018: To Whom Does the U.S. Government Owe Money?

According to the U.S. Treasury Department, the U.S. government spent some $779 billion more than it collected in taxes during its 2017 fiscal year. The difference between this figure and the $1,271 billion that the total national debt officially rose can be attributed to the government's net borrowing to fund things like Federal Direct Student Loans, which have combined to account for over $1.2 trillion of the government's $21.5 trillion debt, or 5.7% of the total public debt outstanding since 2010.

Overall, 70% of the U.S. government's total public debt outstanding is held by U.S. individuals and institutions, while 30% is held by foreign entities. For FY2018, China has retained its position as the top foreign holder of U.S. government-issued debt, with directly accounting for 5.7% between institutions on the Chinese mainland and Hong Kong, even though the country has been reducing its holdings of U.S. government-issued debt.

Japan ranks as the second largest foreign holder of the U.S. national debt, with the U.S. owing Japanese institutions 5.4% of its total debt. After that, the European international banking centers of Belgium, Ireland, and Luxembourg combine to account for 3.2% of the U.S. national debt, followed by Brazil at 1.5% and the United Kingdom with 1.3%.

The largest single institution holding U.S. government-issued debt is Social Security's Old Age and Survivors Insurance Trust Fund, which is considered to be an "Intragovernmental" holder of the U.S. national debt, and which holds 13.0% of the nation's total public debt outstanding. The share of the national debt held by Social Security's main trust fund has begun to decline as that government agency cashes out its holdings to pay promised levels of Social Security benefits, where its account is expected to be fully depleted in just 16 years. Under current law, after Social Security's trust fund runs out of money in 2034, all Social Security benefits would be reduced by 23% according to the agency's projections.

The largest single "private" institution that has loaned money to the U.S. government is the U.S. Federal Reserve which, like China, has been reducing its holdings of U.S. government-issued debt. At the end of September 2018, the Fed held just under 11% of the U.S. government's total public debt outstanding. In FY2018, other U.S. institutions such as pension funds and insurance companies have significantly increased their holdings of U.S. government-issued debt as interest rates rose during that year.

Data Sources

U.S. Treasury. The Debt To the Penny and Who Holds It. [Online Application]. 28 September 2018.

Federal Reserve Statistical Release. H.4.1. Factors Affecting Reserve Balances. Release Date: 26 September 2018. [Online Document].

U.S. Treasury. Major Foreign Holders of Treasury Securities. Accessed 15 August 2019.

U.S. Treasury. Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2018 Through September 30, 2018. [PDF Document].


August 15, 2019

Can you color every two-dimensional map using just four colors so that no areas that share a common boundary are colored the same?

According to the Four-Color Map Theorem, and a bit of graph theory, the answer is yes, as explained by James Grime in the following video:

The cool thing about the proof is that it matters to more than just the visual presentation of maps in the real world. For instance, if you have a mobile phone network, you can keep the transmission signals from its cell towers from interfering with each other over the regions they overlap using just four sets of frequencies.

But since the theorem was originally conceived in connection to its use on maps, here's the world, in just four colors:

World Map in Four Colors - Source: Wikimedia/Fibonacci

Image Credit: Fibonacci (on Wikimedia) via Creative Commons Attribution-Share Alike 3.0 Unported license.


August 14, 2019

Not long ago, we looked at foreign ownership of U.S. stocks, which raised a question from our readers: "How much of the world's stocks do U.S. investors own?"

We don't have a specific answer for that question, because the U.S. Treasury Department groups equities, such as stocks, in with debt having a term-to-maturity of one year or longer into the category of long-term securities in its data on the topic, where the question we can answer is "how much of the world's long-term securities do U.S. investors own?"

In the following interactive graphic, we show the answer recorded at the end of June for each year from 2002 through 2018. [If you're accessing this article on a site that republishes our RSS news feed, please click through to access a fully working version on our site, or click this link to see a static image of that chart.]

In the chart, we've compared apples-to-apples as best we can, showing the values of foreign long-term securities owned by U.S.-based investors against the backdrop of the value of U.S. long-term securities held by foreign interests.

Reviewing the history, we see that U.S. holdings of foreign long-term securities as a percent share of foreign holdings of U.S. long-term securities rose from 54% in 2002 to peak at 70% in 2007 before plunging to a low of 54% in 2010. Through 2018, it has recovered to 63% of the value of foreign-held U.S. long-term securities.


U.S. Department of the Treasury and Federal Reserve Bank of New York. Foreign Portfolio Holdings of U.S. Securities, as of June 29, 2018. [PDF Document]. 15 May 2019.

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