Market Commentary | February 28, 2020

The Federal Debt and Your Investments

The debt bubble may have burst during the 2008–2009 financial crisis, but the United States has been in an ongoing, if subtler, debt crisis ever since.

In fact, the current economic expansion, although the longest, is also the weakest since WWII—due in no small part to the ever-growing debt problem plaguing corporations and the U.S. government. And as debt rises, it tends to crowd out more productive investments and leave the economy vulnerable to a slowdown.

Let’s take a look at the depth of our debt—and how investors might prepare for any repercussions.

In the red

To illustrate the magnitude of U.S. debt, let’s look at total credit market debt (TCMD), which includes all debt from financial and nonfinancial corporations, governments, and households. TCMD is considered high if it exceeds 320% of gross domestic product (GDP) and low if it falls below 160%.

Prior to the financial crisis, the debt-to-GDP ratio rose as high as 380%, fueled in large part by the unmanageable debt loads of financial institutions and households. Although there’s been a significant decrease in such debt since 2009, the debt-to-GDP ratio remains only slightly lower—at 350%—thanks to government and nonfinancial corporate debt (see “Down and up,” below).

Down and up

Source: Charles Schwab, FactSet, and U.S. Federal Reserve, as of 06/30/2019.


The problem, according to Ned Davis Research, is that economic output becomes severely stunted when the debt-to-GDP ratio surpasses that 320% threshold (see “Diminished by debt,” below).

Diminished by debt

Historically, economic activity—as measured by the growth of a variety of indicators—has been slower when the debt-to-GDP ratio has surpassed normal levels.


High debt-to-GDP levels (> 320%)

Normal debt-to-GDP levels (160%–320%)

Low debt-to-GDP levels (< 160%)

Nominal GDP




Real GDP




Nonfarm payroll




CPI inflation




Real nonresidential investment




Nonfinancial productivity




Source: Charles Schwab, FactSet, and Ned Davis Research, Inc. Data from 12/31/1951 through 09/30/2019. Nominal GDP refers to growth in gross domestic product, measured in current prices. Real GDP refers to growth in gross domestic product after adjustments for inflation. Nonfarm payroll refers to growth in the number of U.S. workers, excluding farm workers. CPI inflation is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Real nonresidential investment refers to investments by businesses. Nonfinancial productivity refers to labor productivity at nonfinancial corporations. ©2020 Ned Davis Research. Further distribution prohibited without prior permission. All rights reserved. See Ned Davis Research disclaimer at For data vendor disclaimers refer to

And if you think the government debt problem, in particular, is going to ease up anytime soon, think again. Over the next decade, the Congressional Budget Office expects net interest payments on outstanding federal debt to increase nearly 150%,1 potentially crowding out more productive investments such as infrastructure and research.

Fear not

Until policymakers can come up with a viable solution to ballooning debt, we may be in for an era of weak economic growth and increased volatility. Given that possibility, investors should consider taking the following actions to help offset those risks:

1. Look abroad: U.S. equities may not continue to deliver strong relative returns over the coming decade, so all but the most risk-averse investors should consider having exposure to international and even emerging markets for diversification purposes. Of course, international investing comes with its own risks, including currency weakness and geopolitical turmoil, which is why Schwab suggests that:

  • Conservative investors allocate no more than 5% of their portfolios to international equities—including both developed- and emerging-market companies.
  • Moderate investors who can stomach a bit more risk allocate no more than 15% to international equities.
  • Aggressive investors allocate no more than 25% to international equities.

2. Play defense: As debt crises persist and we near the end of the current economic cycle, bond and stock markets are likely to turn choppy. If you haven’t already done so, consider adding defensive assets to your portfolio, such as low-volatility stocks and precious metals. U.S. Treasuries, too, remain a good defensive choice; it would take much more than the current debt problem to jeopardize the security of federally backed bonds.

3. Rebalance regularly: During periods of volatility, your portfolio may deviate from your target asset allocation more dramatically than usual—resulting in undue risk. Adopting a disciplined rebalancing strategy can keep your investments on a more even keel.

In short, investors are right to be concerned about historically elevated debt levels, whether from the private or public sectors. But with a little planning, you can reposition your portfolio to help weather the uncertainty.

1Updated Budget Projections: 2019 to 2029, 05/02/2019.