Debt Levels Rise as the Midterms Come Into Focus

Debt Levels Rise as the Midterms Come Into Focus

Stocks had a strong week, with the S&P 500 up 1.17% to 7,812 and the Nasdaq Composite up 0.65% to 27,366, while the Dow added 0.96%. Small caps lagged, with the Russell 2000 down 0.90%. Year-to-date, the S&P 500 is up 15.14%, the Nasdaq 18.28%, and the Dow 8.80%.

Services Expand, Trade Gap Widens

September’s Services PMI rose to 58.8, a solid reading pointing to continued expansion, while the trade deficit widened to $105.6 billion.

U.S. Debt Surpasses $40 Trillion

The federal fiscal year ended last month, and while official Treasury figures are still pending, the Congressional Budget Office estimates the U.S. ran a budget deficit of roughly $1.993 trillion in FY2026. That adds to a national debt burden that now stands above $40 trillion and has become a growing focus for fixed income investors.

Rising Debt, Limited Fiscal Flexibility

With the midterm elections approaching, debates around government spending and the nation’s fiscal outlook have moved back into focus. Much of today’s debt reflects past policy decisions, but a meaningful share of future spending growth, tied to Social Security, Medicare, and rising interest costs as the population ages, is effectively on autopilot. Even under a split government that limits new fiscal stimulus, we expect debt levels to keep climbing in the years ahead absent significant policy changes.

Bond Yields Rise

The U.S. is projected to reach its $41.1 trillion debt limit before the end of 2027, a ceiling that was itself raised by $5 trillion just one year ago. Growing borrowing needs could keep long-term yields elevated, limiting how much rates might fall even if the economy were to weaken. That said, those same higher yields mean investors are being compensated with higher coupon payments, which we view as a genuine attraction of bonds within diversified portfolios today.

Labor Market Remains Resilient

This fiscal backdrop is playing out against a labor market that remains historically healthy: unemployment stood at 4.2% in September, below its long-run average of 5.8%, while broader underemployment (U-6) sits at 7.6%. A resilient job market gives the economy more room to absorb higher borrowing costs than it would if layoffs were accelerating.

Looking Ahead

Looking ahead, this week’s CPI and PPI readings will be the next test of whether inflation is cooperating enough to keep the Fed’s recent pause intact.

As Always

I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.