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The stock market can seem a bit schizophrenic to untrained observers. A lot of people can’t understand for example, how deeply negative consumer sentiment corresponds to higher stock prices in the future.
Another contrarian indicator is the amount of money collected by Uncle Sam. Obviously, when we have an economic slowdown, the government collects less taxes from corporations and individuals. So why would this be a positive development for stock prices?
The recent economic malaise is so serious that it has reduced the total government tax receipts relative to GDP to levels not seen since the 1950’s:
What is bad news for the US budget, may actually be good news for the stock market. As Tom McClellan writes:
…whenever total revenues get down to below 17% of GDP, the years which follow tend to be really good ones for stock prices. Conversely, seeing federal revenues at 18% or higher tends to have a depressing effect on stock prices.
…the federal government has been doing a lot of deficit spending to try and revive the economy, so a lot more of GDP lately has been government spending. The net result is that a lot more money is staying in the economy, allowing it to be put toward the task of lifting stock prices. In every case when federal revenues drop to a very low percentage of GDP, it is bullish for stock prices in the years that follow.
Peter Orszag estimates that the ratio will rise to 19% by 2014. If that estimate is borne out then it would be the 4th time in US history. The first was after World War II (not shown in the above chart), the second in 1982 and the third from 1998 to 2001.
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