How could the stock market continue to rise during the pandemic? Why are stocks rising while so many Americans are still unemployed? The economy does not seem to be doing well, but stocks continue to go up, why? I continue to hear these questions in my conversations with clients, as many rightfully see a disconnect between their own experience and what they are seeing in the market. We have discussed several key trends affecting the market in 2021: a receding virus, low interest rates, and massive government stimulus. This week we will review the last factor, the massive amount of stimulus affecting the economy and market.
Almost exactly one year ago the market began falling as word of another ‘SARS-like’ virus began hitting the news. Within weeks the market had experienced one of the sharpest declines in history, falling more than 33% in 33 calendar days as governments around the world enacted unprecedented, forced shutdown of businesses. To help offset the economic fallout, Congress began passing a series of economic stimulus bills, which were also unprecedented in size. Here is how the stimulus adds up:
March 2020: $2.2 Trillion Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) Among other measures, the CARES Act featured $1,200 direct support payments to Americans, and a $349 Billion Paycheck Protection Program (“PPP”) to businesses.
April 2020: $483 Billion Paycheck Protection and Health Care Enhancement Act After the initial passage, Congress determined that the original CARES Act was not enough and quickly added $321 Billion to the PPP and provided additional support to small business and healthcare providers.
December 2020: $900 Billion Coronavirus Response and Relief Supplemental Appropriations Act In December the PPP was raised by another $284 Billion and eligible Americans were provided an additional $600 per person.
The first 3 bills total $3.6 Trillion in direct government aid to individuals, small business, and local government. When the numbers become this large it can become difficult to comprehend how much is really being spent. Here are a few reference points to help put the stimulus in perspective. The total Gross Domestic Product of the United States, which is the value of all goods and services exchanged in the United States, in 2019 was $21.4 Trillion per the Bureau of Economic Analysis. Similarly, the total National Debt was $22 Trillion at the end of 2019. In terms of the average worker, $3.6 Trillion is equal to the income of 54 million Americans earning the median wage of $65,712 for a year.
Given the tremendous amount of stimulus poured into the economy, the economic and stock market recovery begins to make sense. Moreover, there is more stimulus promised to come. Here is an outline of the expected stimulus in the coming months.
$1.9 Trillion American Rescue Plan The American Rescue Plan proposed in January features $1,400 additional checks to individuals. While the plan is currently being debated in congress, it is expected to pass in the coming weeks bringing the total stimulus poured into the US economy in the last year to $5.5 Trillion, approximately 25% of the total annual GDP of the United States. Note that this stimulus spending is in addition to the usual federal budget.
Possible $2.0 Trillion Infrastructure and Green New Deal While far from settled, proposals for a major new infrastructure spending package, focused on green energy, are already being considered. Democrats will need some Republican support for such a bill, but the package were to pass as proposed it would bring the total stimulus spending to $7.5 Trillion.
I have always maintained that the government does not control the economy. I maintain that what happens to interest rates and the business cycle are far more important than what happens in Congress. Nonetheless, when the size of the spending reaches these levels it is evident that government spending has become a driving force behind the economy and markets. It will be important to watch the progress of the spending bills as we continue into 2021.