Asset Allocation Chart of the Month
Deficits Without End
- This month's chart offers a historical lens on the U.S. federal budget, illustrating the evolving composition of spending categories—Mandatory, Discretionary, and Net Interest—as percentages of Gross Domestic Product (GDP). This perspective provides context for current budget negotiations and fiscal policy discussions.
- According to the Congressional Budget Office, 10-year deficit projections increased by 80% during the Biden administration; they captioned it as “Biden’s Four Years of Fiscal Failure.” The leadership in Washington has decided that it wasn’t enough, introducing what some are calling a big, beautiful deficit.
- The recently passed House reconciliation budget package is estimated to increase the deficit by an additional 15-24%, and under their plan, U.S. debt is expected to nearly double over the next 10 years. Investor concerns about escalating deficits and rising debt burdens are manifesting in higher interest rates and a weakening dollar.
- Discretionary spending’s share of the economy has been declining and is the primary focus of DOGE’s efforts to streamline expenditures. We believe discretionary spending is likely to continue to shrink as a percentage of GDP.
- Mandatory spending has grown significantly, driven by demographic shifts, rising healthcare costs, and legislative expansions. In the proposed House budget bill, approximately two-thirds of the spending cuts target Medicaid. However, the Senate’s acceptance of these cuts remains uncertain due to potential voter backlash. Nonetheless, meaningful progress in addressing budgetary concerns is likely to necessitate reductions in mandatory spending.
- Net interest is becoming a significant portion of our budget and is projected to continue growing due to higher debt levels and interest rates. Currently, the average interest rate on federal debt remains below prevailing Treasury yields across all maturities.
- We believe that our fiscal path is unsustainable, but the legislative will to address it appears absent. Failure to do so may lead to even more elevated borrowing costs, make it difficult for the Fed to cut interest rates, reduce fiscal flexibility during crises, suppress private investment, and slow economic growth.
The Touchstone Asset Allocation Committee
The Touchstone Asset Allocation Committee (TAAC) consisting of Crit Thomas, CFA, CAIA – Global Market Strategist, Erik M. Aarts, CIMA – Vice President and Senior Fixed Income Strategist, and Tim Paulin, CFA – Senior Vice President, Investment Research and Product Management, develops in-depth asset allocation guidance using established and evolving methodologies, inputs and analysis and communicates its methods, findings and guidance to stakeholders. TAAC uses different approaches in its development of Strategic Allocation and Tactical Allocation that are designed to add value for financial professionals and their clients. TAAC meets regularly to assess market conditions and conducts deep dive analyses on specific asset classes which are delivered via the Asset Allocation Summary document. Please contact your Touchstone representative or call 800.638.8194 for more information.
A Word About Risk
Fixed-income securities can experience reduced liquidity during certain market events, lose their value as interest rates rise and are subject to credit risk which is the risk of deterioration in the financial condition of an issuer and/ or general economic conditions that can cause the issuer to not make timely payments of principal and interest also causing the securities to decline in value and an investor can lose principal. When interest rates rise, the price of debt securities generally falls. Longer term securities are generally more volatile. Investment grade debt securities may be downgraded by a Nationally Recognized Statistical Rating Organization to below investment grade status. Non-investment grade debt securities are considered speculative with respect to the issuers' ability to make timely payments of interest and principal, may lack liquidity and has had more frequent and larger price changes than other debt securities. Equities are subject to market volatility and loss. Growth stocks may be more volatile than investing in other stocks and may underperform when value investing is in favor. Value stocks may not appreciate in value as anticipated or may experience a decline in value. Stocks of large-cap companies may be unable to respond quickly to new competitive challenges. Stocks of small- and mid-cap companies may be subject to more erratic market movements than stocks of larger, more established companies. Investments in foreign, and emerging market securities carry the associated risks of economic and political instability, market liquidity, currency volatility and accounting standards that differ from those of U.S. markets and may offer less protection to investors. The risks associated with investing in foreign markets are magnified in emerging markets, due to their smaller and less developed economies.
The information provided reflects the research and opinion of Touchstone Investments as of the date indicated, and is subject to change without prior notice. Past performance is not indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing in certain sectors may involve additional risks and may not be appropriate for all investors. The indexes mentioned are unmanaged statistical composites of stock or bond market performance. Investing in an index is not possible. For Index Definitions see: TouchstoneInvestments.com/insights/investment-terms-and-index-definitions
Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one on the resources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.
Investment return and principal value of an investment in a Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. All investing involves risk.
Touchstone Funds are distributed by Touchstone Securities, Inc.*
*A registered broker-dealer and member FINRA/SIPC.
Touchstone is a member of Western & Southern Financial Group
Not FDIC Insured | No Bank Guarantee | May Lose Value
