Markets
What Drives Long-Term National Debt Growth?
What Drives Long-Term National Debt Growth?
With the current 106% debt-to-GDP ratio, there’s no doubt that today’s government debt is high. The last time the United States reached this mark, it was during the aftermath of WWII in the late 1940s.
But despite nearly historic debt levels, it does not seem that the national debt is a key issue for most citizens and groups. What drives this accumulation of debt in the long run, and at what point does the debt level become so high that it becomes an undeniable and critical issue for the country?
Today’s infographic comes from the Peter G. Peterson Foundation, a NYC-based group that focuses on educating people about the fiscal challenges of growing government debt. The graphic illustrates the main factors driving the debt upwards, as well as the potential impact down the road.
Rising Temperatures
The trouble with debt is that it delays today’s challenges well into the future, making it a tempting short-term solution when other things aren’t working. However, over time, that burden increases steadily, and the situation quickly represents the “frog and boiling water” parable.
So what’s raising the temperature of that water?
Right now, the aging of the Baby Boomers is a key factor, and the amount of people receiving social security benefits will swell from 62 million to 88 million people by 2035. At the same time, Medicare’s hospital trust fund will run out of money by 2029, and the program will only remain solvent until 2034.
Whether it’s the growing enrollment in these programs or the rapidly escalating costs of healthcare itself, more money will be put towards Social Security and healthcare over the coming years.
By about 2045, government spending on major health programs will nearly double in size to greater than 9% of GDP.
Boiling Water
Today, interest on the debt is equal to about 1.4% of GDP.
However, if the projected pace is maintained, it’s anticipated that interest payments could be equal to 6.2% of GDP by 2047 – this is roughly 2x the average annual amount the federal government spends on education, infrastructure, and R&D combined.
As economists will point out, the government controls the monetary supply and can easily “print” money to make these payments. This is absolutely true, but it also creates an array of other problems such as inflation and increasing distrust in the monetary system.
Though this boiling point looms further down the road, having a plan to cool the temperature (or to jump out of the water) could be a prudent one to keep in our back pockets.
Markets
The European Stock Market: Attractive Valuations Offer Opportunities
On average, the European stock market has valuations that are nearly 50% lower than U.S. valuations. But how can you access the market?
European Stock Market: Attractive Valuations Offer Opportunities
Europe is known for some established brands, from L’Oréal to Louis Vuitton. However, the European stock market offers additional opportunities that may be lesser known.
The above infographic, sponsored by STOXX, outlines why investors may want to consider European stocks.
Attractive Valuations
Compared to most North American and Asian markets, European stocks offer lower or comparable valuations.
| Index | Price-to-Earnings Ratio | Price-to-Book Ratio |
|---|---|---|
| EURO STOXX 50 | 14.9 | 2.2 |
| STOXX Europe 600 | 14.4 | 2 |
| U.S. | 25.9 | 4.7 |
| Canada | 16.1 | 1.8 |
| Japan | 15.4 | 1.6 |
| Asia Pacific ex. China | 17.1 | 1.8 |
Data as of February 29, 2024. See graphic for full index names. Ratios based on trailing 12 month financials. The price to earnings ratio excludes companies with negative earnings.
On average, European valuations are nearly 50% lower than U.S. valuations, potentially offering an affordable entry point for investors.
Research also shows that lower price ratios have historically led to higher long-term returns.
Market Movements Not Closely Connected
Over the last decade, the European stock market had low-to-moderate correlation with North American and Asian equities.
The below chart shows correlations from February 2014 to February 2024. A value closer to zero indicates low correlation, while a value of one would indicate that two regions are moving in perfect unison.
| EURO STOXX 50 | STOXX EUROPE 600 | U.S. | Canada | Japan | Asia Pacific ex. China |
|
|---|---|---|---|---|---|---|
| EURO STOXX 50 | 1.00 | 0.97 | 0.55 | 0.67 | 0.24 | 0.43 |
| STOXX EUROPE 600 | 1.00 | 0.56 | 0.71 | 0.28 | 0.48 | |
| U.S. | 1.00 | 0.73 | 0.12 | 0.25 | ||
| Canada | 1.00 | 0.22 | 0.40 | |||
| Japan | 1.00 | 0.88 | ||||
| Asia Pacific ex. China | 1.00 |
Data is based on daily USD returns.
European equities had relatively independent market movements from North American and Asian markets. One contributing factor could be the differing sector weights in each market. For instance, technology makes up a quarter of the U.S. market, but health care and industrials dominate the broader European market.
Ultimately, European equities can enhance portfolio diversification and have the potential to mitigate risk for investors.
Tracking the Market
For investors interested in European equities, STOXX offers a variety of flagship indices:
| Index | Description | Market Cap |
|---|---|---|
| STOXX Europe 600 | Pan-regional, broad market | €10.5T |
| STOXX Developed Europe | Pan-regional, broad-market | €9.9T |
| STOXX Europe 600 ESG-X | Pan-regional, broad market, sustainability focus | €9.7T |
| STOXX Europe 50 | Pan-regional, blue-chip | €5.1T |
| EURO STOXX 50 | Eurozone, blue-chip | €3.5T |
Data is as of February 29, 2024. Market cap is free float, which represents the shares that are readily available for public trading on stock exchanges.
The EURO STOXX 50 tracks the Eurozone’s biggest and most traded companies. It also underlies one of the world’s largest ranges of ETFs and mutual funds. As of November 2023, there were €27.3 billion in ETFs and €23.5B in mutual fund assets under management tracking the index.
“For the past 25 years, the EURO STOXX 50 has served as an accurate, reliable and tradable representation of the Eurozone equity market.”
— Axel Lomholt, General Manager at STOXX
Partnering with STOXX to Track the European Stock Market
Are you interested in European equities? STOXX can be a valuable partner:
- Comprehensive, liquid and investable ecosystem
- European heritage, global reach
- Highly sophisticated customization capabilities
- Open architecture approach to using data
- Close partnerships with clients
- Part of ISS STOXX and Deutsche Börse Group
With a full suite of indices, STOXX can help you benchmark against the European stock market.
Learn how STOXX’s European indices offer liquid and effective market access.
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