The headlines on two recent investment articles caught my attention.

One said: “The Federal Government Deficit is Huge, So Buy Stocks!”

The second was: “Is the Stock Market Doomed? Yes, But Maybe Not in 2025.”

Like a lot of baby boomers, I watch my retirement portfolio and wonder if it will crash and burn under Trump tariffs and immigrant detention centers, or will it surge as artificial intelligence (AI) achievements are monetized?

Could it do both?

I know politics do not drive the stock market, but out of curiosity I looked at what has happened over the past eight years – four under Republican Donald Trump and four under Democrat Joe Biden.

During the first year of Trump’s first term, the S&P 500 market index gained 19%, before losing 6% in the second year and gaining 28% and 16% in years three and four. The cumulative total increase over four years was 68%.

During the Biden administration, the S&P 500 went up 27% in 2021, lost 19% the next year, gained 24% in year three and is on track to gain about 25% this year, which would make the total increase for the four years about 62%.

For both presidents the compounded S&P index gains amount to about 13% a year, which is above the long-term S&P average of 8-10% a year.

The Wall Street Journal’s StreetWise columnist James Mackintosh noted recently that “stocks are super expensive on just about every measure,” which is not something most investors want to hear.

But, he added, “history also suggests no link at all between nosebleed valuations like we have today and returns over the next year.”

Which brings me to the headline written by Minneapolis-based economist James Paulsen: “The Federal Government Deficit is Huge, So Buy Stocks!”

“In the investment biz, large federal government deficits – particularly peace-time deficits – are loathed,” Paulsen wrote earlier this month in his column on Substack.com.

“Big deficits mean big taxes,” and other unwelcome things, like the possibility of the government defaulting on debt, which would lower government credit ratings and discourage foreigners from buying our bonds.

With large deficits, Paulsen wrote, “companies could leave the U.S. seeking out more stable markets. Bond vigilantes could demand higher yields.” Large deficits “cause inflation and ultimately bring a recession or perhaps a depression.”

“However,” Paulsen added, “if the emotion created by the words ‘government deficit/debts’ can be set aside for a moment, and one examines the dispassionate cold historical data, you arrive at nearly the opposite conclusion.”

The economist traced the history of the federal deficit/GDP ratio since World War II and found some interesting patterns, including a trend towards larger and larger deficits, particularly since 2000.

The Great Recession of 2007-09 blew the bottom out of Paulsen’s deficit/gross domestic product (GDP) chart, which led Paulsen to the question: “Do unchecked federal deficits cause recessions?”

But, he wrote, of the 12 U.S. recessions since 1947, two occurred during budget surpluses, three when the deficit/GDP ratio was minimal (less than 1%), and five when the deficit was relatively small (1-2.7%). Only two recessions occurred when the deficit/GDP ratio was more than 3%. (Disclosure: it’s now north of 6%.)

“If the 2020 recession is exempted (since it was caused by a global pandemic and severe supply shortages), the average deficit/GDP ratio when a recession first commenced was only 1.34%,” Paulsen wrote.

“When the government runs huge deficits, recessions hardly ever occur,” he noted.

Conversely, “recession risk rises substantially as the government deficit/GDP ratio becomes smaller.” In fact, he added, “the economy has rarely experienced recessions when the government had large fiscal deficits.”

Nor do large federal deficits appear to have an adverse effect on stock markets. In fact, during the post-war era, the highest average returns for the S&P 500 have accompanied the largest federal deficits.

Neither Paulsen nor Mackintosh looked very far into the future, but as Mackintosh put it: “Expensive stocks can always get more expensive, and often do.”