Market Outlook | Winter 2021

The stock market typically anticipates economic activity six months out.  In other words, if you want an idea for where the economy is headed, look to the stock market.  In the wake of positive vaccine news from Moderna, Astra-Zeneca, Pfizer and most recently Johnson and Johnson, the anticipation is that the economy will begin to re-open this spring.  In fact, public health experts recently reported that nationwide, new cases are down 56% over the past month.  Hospitalizations are down 38% since January 6th and the seven day average of Covid 19 positive test ratio has plunged to 6.93%, our lowest rate since October 31st!*

The question is, with employment firming up, vaccines rolling out and signs the pent-up consumer demand will be released when the economy opens up, do we need a large economic stimulus at this time?  Some point to the weakness in the employment numbers and say yes.  Others are concerned that increasing the money supply will lead to rampant inflation.  

We need stimulus

In the meantime, we have conflicting signs for the economy.  On the employment front the bad news is retailers, warehouse and delivery service jobs lost a combined 69,000 jobs in January.  Additionally, health care cut 30,000 jobs.  For each of these categories January was the first negative month since April. ** 

Economists who support large fiscal stimulus point out that inflation is well under control and hasn’t been a problem for decades.  Furthermore, there are many global deflationary factors that have been in play for some time.  Advances in technology, slower growth in Europe, aging population in Asia are just three trends that should keep a lid on prices.  

The Economy is fine without it

Still, total employment rose by 381,000 in January.  Additionally, higher paying jobs in finance, tech and consulting have held up reasonably well.  As of last month, employment in all three has either returned to where it was before the pandemic or is now even higher.  Furthermore, hiring in finance and tech is accelerating with jobs postings up more than 11% and 20% respectively since the end of September. *  

Interestingly, both Democratic economists Larry Summers and Olivier Blanchard, former IMF chief economist and former GOP senator and economist Phil Gramm agree that a $1.9 trillion spending plan may carry more risks than benefits.  According to a recent House Budget Committee estimate, $1 trillion from last year’s bill hasn’t been spent yet.  Assuming there will not be a tax increase to pay for this stimulus, the money supply will need to be increased.  Basic economics teaches us that when you increase the supply, the price (or value) will drop.

Employers are desperate to hire, but Congress made it harder by reinstating the $300 per week in enhanced jobless benefits through mid-March.  The jobless rate is already down to 6.3%.  For proper context in the last recession, it peaked at 10% in October of 2009.#

Summary

In the end, there are risks on all sides.  However, there is evidence much of the individual stimulus money that was sent has increased consumer savings.  The pent-up demand will likely be just the kickstart our economy needs, with or without additional stimulus.

*Wall Street Journal Stimulus Inflation isn’t market Fear 2/10/2021

**Barron’s: The Economy February 8, 2021

# Wall Street Journal:  Wrong Stimulus, Wrong time February 6-7 2021