Is your portfolio safe from U.S. fiscal policy? Fiscal policy decides the tax rates you pay and the government’s spending, and the 2026 fiscal year (FY) for the federal government just began last month.
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With the national debt at over $38 trillion, JPMorgan thinks it’s worth looking at how “the steady deterioration of U.S. government finances” could impact investor returns. [1]
The impacts of growing government debt
The federal budget deficit was $1.8 trillion in FY 2025, or 6% of GDP.
In a note released October 13, JPMorgan chief global strategist David Kelly said 6.7% of GDP is a “low-ball” forecast of the FY 2026 deficit.
Under the bank’s assumptions, the debt-to-GDP ratio will climb from 99.9% in September to 102.2% by September 2026. There are good reasons to believe, however, that the debt will rise even faster than this,” said Kelly, citing the possibility of the Supreme Court saying Trump’s tariffs are illegal, possible stimulus distributions, and other major spending that may come up.
Over the long-term, JPMorgan sees the deficit ranging between 6% and 7% of GDP into the next decade, boosting the debt-to-GDP ratio by roughly 2% each year.
“However, even this may be too optimistic as it assumes uninterrupted economic growth and, more importantly, that despite populism from both the right and the left, Congress finds the discipline to avoid both further tax cuts or expanded government programs,” wrote Kelly. “A more likely scenario is that, either due to an emergency or a recession, the deficit ratchets up to 7% or more of GDP, leading to an acceleration in federal debt accumulation.”
Rising national debt can reduce the size of the economy, number of jobs, private investment and wages, according to a quantitative study by the Peter G. Peterson Foundation. [2] And rising federal deficits and debt can cause higher inflation and interest rates, according to an analysis from The Budget Lab at Yale. [3]
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Still, many of these changes take time.
“The question I am asked most frequently by investors and financial advisors is when is the federal debt going to blow up in all of our faces,” wrote Kelly. “My usual answer is that, while we are going broke, we are going broke slowly.”
He points out that global bond markets are “very well aware of the trajectory of U.S. debt,” and yet the fact that “the U.S. government can borrow money for 30 years at a yield of just 4.6% speaks to a conviction that there remains room for the government to borrow more.”
However, he adds that “there is a danger that political choices lead to a faster deterioration in the federal finances.”
Even though these changes are happening slowly, long-term investors and retirees who want their nest egg to last several decades may want to account for this when designing their portfolios. If debt and deficit issues lead to a recession or rising rates, there’s a risk that the U.S. stock markets could sell off — possibly dramatically.
How to protect against these risks
In his note, Kelly said based on current allocations and valuations alone, “many investors should likely consider diversifying their portfolios by adding alternative assets and international stocks.”
Some examples of alternative assets are real estate, commodities like gold and cryptocurrencies. When it comes to real estate, investors don’t need to directly own properties. They can opt for real estate investment trusts (REITs) or REIT exchange-traded funds (ETFs).
International stock exposure can also be gained through various ETFs. Diversifying your stocks internationally could help to avoid some of the issues affecting the domestic markets, particularly if you seek to invest in countries that are less influenced by the state of the U.S. economy. You may also benefit from a weakening dollar, which can result from higher inflation. Vanguard recommends that at least 20% of both stocks and bonds in your portfolio should be held in international investments.
“The risk that we move from going broke slowly to going broke quickly adds an important reason to make this move today,” warned Kelly.
Other popular strategies
The federal finances deteriorating could hurt the returns of any investor, but it’s particularly dangerous for retirees who are vulnerable to what’s known as the “sequences of returns risk.”
This occurs when withdrawals are made in a down market, so when the market rebounds there are fewer assets available to participate in that growth — which is particularly damaging in the early years of retirement.
One way to protect against the sequences of returns risk is to use a bucketing strategy where you divide your portfolio into short, medium and long-term spending goals. The short-term bucket consists of highly liquid investments such as cash that, combined with guaranteed payments such as Social Security, can cover your expenses for one to two years.
“If you’re always spending from a cash bucket, then you don’t have to worry as much about making withdrawals when the market is down,” Amy Arnott, a portfolio strategist with Morningstar Research Services, told CNBC. [4]
To protect your portfolio from inflation, one strategy is to maximize equity exposure versus bonds as much as possible, depending on your risk tolerance, life stage and goals.
Treasury Inflation-Protected Securities (TIPS) are another investment to consider if you’re worried about inflation. These bonds are issued by the U.S. government and have interest payments and principal values that increase with inflation.
Another strategy is laddering your CD and bond holdings. This entails purchasing bonds or CDs that mature at regular intervals, such as every six months. As rates rise, the proceeds from maturing bonds can be reinvested at higher rates.
There’s a lot to consider when preparing for any of these potential events. It may be worth consulting with a financial advisor to ensure any strategy you pursue fits into your overall goals and risk tolerance.
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Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
JPMorgan (1); Peter G. Peterson Foundation (2); The Budget Lab (3); CNBC (4)
This article originally appeared on Moneywise.com under the title: America is ‘going broke slowly,’ says JPMorgan — how to keep your portfolio safe as the national debt tops $38 trillion
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.