Chief market strategist looks past today’s market volatility to a much greater risk: deficits
Jim Thorne is worried about what happens late in 2025 or early in 2026. The chief market strategist at Wellington Altus Private Wealth is far less concerned about today’s volatility. In fact, he believes the S&P 500 should end the year higher than it was in June and July. What gives him pause are US deficits equivalent to 7 per cent of GDP and a debt to GDP ratio of around 125 per cent. By the end of next year, he expects there to be a reckoning.
That reckoning, Thorne says, may take the form of a “Liz Truss moment.” As neither US presidential candidate is talking about deficits now, he believes that credit markets may eventually force them to act. It’s a situation similar to the disastrous tenure of Liz Truss as Prime Minister of the UK, when she imposed a budget wholly divorced from her country’s fiscal situation and credit markets punished her government by demolishing the value of the pound and taking UK equity markets. He says that when asset managers look at the US economy, they should be cognizant of the role deficits can play because they may set the stage for the next major market correction.
“If neither candidate deals with this we will have a 1987 type crisis because credit markets will force their hand,” Thorne says. “The Fed is going to cut soon and they are behind the curve. The private sector is getting crushed if you look at earnings. The GDP number is clouded by deficit spending… The market is being skewed by this extreme level of government spending and that is clouding GDP data and price data. If we get fiscal responsibility, we’re going to see a growth scare in late 2025 and early 2026.”
Until that time, Thorne says its likely that US equities remain in a secular bull market — despite the recent pullback. He believes that while AI will create a bubble, that bubble will come at the end of this decade or the start of the next. In the meantime, the productivity implications of AI, and the huge capital expenditures firms are ploughing into the theme, may keep the US on course for a soft landing while Canada and the EU economies fall into recession. However, he believes that in roughly 18 months investors will start seeing how earnings are impacted, prompting a significant correction in equities.
For all the allegories made to the 1970s since the onset of high inflation emerging from the COVID-19 pandemic, Thorne likens this moment more to the US economy after WWII. Where the 1970s followed two decades of controlling debt to GDP, the late 1940s and 1950s came following one of the most stimulative periods in economic history. The United States experienced three years of over 10 per cent inflation. The risk, therefore, emerges more from the transition away from that deficit spending than it does in interest rate cuts sparking inflation again.
Even though he thinks Canada is set for a deeper downturn than the US, Thorne acknowledges that Canada’s public deficit situation is not as dire as our friends south of the border. Where debt becomes a problem for Canada, he says, is in our personal and corporate debt levels which never went through the de-leveraging post-2008 that we saw in the Untied States, largely due to the comparative solidity of our banking sector. Moreover, the fundamentals of the Canadian economy remain weaker than the US. Our economy is less diversified and less exposed to innovative growth trends like AI. As well, even though Canada’s deficit levels are more manageable, the public sector plays a massive role in our wage and GDP growth.
Thorne’s view is that interest rates will likely be cut down to around two per cent within the next 18 months, as central banks acknowledge the deep impact that rate hikes have had on their economies to date. He expects, too, that inflation should come under control as part of the deleveraging that the US government will be forced to do.
Right now, Thorne believes the bull market will continue even if there are some corrections. He argues that asset managers need to move out of cash. He sees upside in equities, fixed income, and private assets but says that cash right now won’t provide what institutions need. He says, too, that institutions need to consider an allocation not bitcoin.
Thorne expects that bitcoin will come to rival gold as an asset class. Moreover, if we are entering a period of economic reflation, only two assets have outperformed during past reflation periods: the NASDAQ 100 and bitcoin. He argues that forward-thinking pensions and institutions should look closely at bitcoin as they head into what may be a crucial year for asset allocation.
“The big asset allocation decision is this time next year,” Thorne says. “So what does your portfolio look like going into late 2025 or early 2026? I say you buy the dips until you get to 6500 on the S&P 500, then you sell the rallies. You’ve got a massive drawdown coming at you in 2026 for the first nine months. So how do you want to position your portfolio for that?”
