The SPDR S&P 500 (SPY) and Invesco QQQ (QQQ) ETFs have been two of the best-performing funds in decades. QQQ, which tracks the Nasdaq 100 index, has jumped by over 615% since inception while the SPY ETF is up by more than 897%.
QQQ vs SPY ETFs
US stocks always riseThe SPY and QQQ ETFs have proven that American equities always rise in the long term. They have all done well after key events in the financial market. For example, US equities recovered swiftly after collapsing hard during the dot com bubble in early 2000.
Similarly, the two ETFs recovered after dipping sharply during the Global Financial Crisis (GFC) in 2009. At the time, the S&P 500 index plunged by more than 40% as concerns about the American economy rose following the collapse of Lehman Brothers.
Most recently, American stocks recovered after the World Health Organization (WHO) declared Covid-19 a global pandemic. After dipping initially, stocks surged to record highs in 2019.
Additionally, in 2023, stocks staged a strong recovery, paring back losses experienced in 2022 when the Federal Reserve started hiking rates. The S&P 500 index fell BY 18.11% in 2022 while the tech-heavy Nasdaq 100 index declined by 32.4%.
US stocks have also emerged well after all geopolitical events of the last few years. For example, they recovered after Trump’s trade wars, 911 attack, the war in Ukraine, and the oil embargo of the 70s.
All this is evidence that American equities have been some of the best investments in decades. This trend could continue over the years, helped by the ongoing innovation in the technology sector and robust earnings growth.
A black swan event is comingStill, the S&P 500 and Nasdaq 100 indices face a major risk in the coming years. Analysts believe that the fiscal situation in the US is a major risk that could lead to substantial issues for the economy and stocks.
America’s public debt jumped to over $34 trillion last week, a few months after it crossed the $33 million level. Meanwhile, politicians in Washington have now passed a deal to fund the government with $1.6 trillion. They are also negotiating another major funding deal for Ukraine, Taiwan, and Israel.
Over the next 3 years 50% of the $34 trillion #NationalDebt matures. During those years budget deficits will add at least another $10 trillion. If the Govt. pays 5.5% interest on that $27 trillion, ignoring the other $17 trillion, the annual interest cost will be $1.5 trillion.
— Peter Schiff (@PeterSchiff) October 31, 2023All this means that the country’s debt burden is about to get worse. I suspect that this debt will end the year above $35 trillion if this trend continues. Worse, US budget deficit is expected to jump to over $1.8 trillion this year and it is not coming down any time soon.
Meanwhile, the US is paying loads of money on interest. In the last fiscal year, it spent almost $1 trillion on interest alone. This trend could continue even when the Fed cuts interest rates as most analysts expect.
The US fiscal crisis poses a major issue for the SPY and QQQ ETFs. In the past, the US has navigated various crises by offering huge stimulus packages and by Fed rate cuts. It solved the GFC in 2009 by offering a $700 billion bank bailout.
The Fed also printed huge sums of money during the pandemic as the government dished trillions of dollars in stimulus. Both Joe Biden and Trump provided free checks to most Americans.
In the future, this extravagant spending will likely be impossible. For one, the bond market will likely reject Fed’s efforts to cut interest rates. We saw this recently when the Treasury failed to raise 30-year funds as the market demanded more interest to cover the rising default risks.
Watch here: https://www.youtube.com/embed/Nu96gTe5410?feature=oembedKeep in mind that the US is expected to face a major social security crisis in the next few years. The Social Security Administration (SSA) expects the trust fund to run out in 2037 but analysts believe that it will happen sooner.
Therefore, while the SPY and QQQ ETFs will likely do well over time, there are risks when the next black swan event happens.
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