Booming stock market reflects ‘very bright outlook’ for economy, says finance professor

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(TBEN Detroit) – The stock market continued to rise last week. Even on Wednesday, the day rioters stormed the U.S. Capitol to stop certification of electoral college votes confirming Joe Biden’s election as president, the Dow Jones rose nearly 500 points. He finished the week above 31,000 and close to his all-time high. The S&P 500 and NASDAQ also posted gains on this day and for the week.

Rising stock prices in the face of government unrest does not make sense at first glance. Investors are enjoying the stability, and an angry mob interrupting the certification of a presidential election suggests otherwise. But maybe there is more to the story.

All three indices showed declines at the end of the day, when events on Capitol Hill were snowballing. But they gained ground early in the day, when the big news was still the Senate runoff in Georgia. Perhaps this story had much more bearing on the future of the market and the economy in general.

“The morning hike would be consistent with the results of the Georgia Senate election, indicating that there will be more chances that a bigger stimulus bill will soon be available for the economy, including the The economy needs it, and the stock market wants, and the vast majority of Americans want it and would benefit from it, ”says David Kass, clinical professor of finance at the Robert H. Smith School of Business at the University of Maryland.

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Democrats Jon Ossoff and Raphael Warnock won Senate seats on Tuesday, changing the political landscape for at least two years. The upper room is now split 50-50. (Democrats actually hold 48 seats, but independents Angus King of Maine and Bernie Sanders of Vermont tend to vote with them.) Vice President-elect Kamala Harris will vote for all ties, once she takes office . Party line votes on topical issues seem likely, given the partisanship that still exists.

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With Biden’s inauguration on January 20, Democrats will control the presidency and both houses of Congress. Their simple majority in the Senate will not give them the 60 votes to defeat a filibuster without bipartisan support. And that makes broad legislation unlikely. But a simple majority gives the president-elect enough votes to get into the race when he takes office. Biden will be able to confirm his Cabinet nominees and pass legislation related to budgets and spending through a legislative process called reconciliation.

One of those pieces of legislation would be another stimulus package. This could include a much talked about $ 2,000 stimulus check, as well as the continuation of various unemployment programs. Aid to cities and states and more money for COVID-19 testing and vaccinations would also likely be in the mix. A possible target date could be mid-March, when the current unemployment extensions are expected to run out.

So, while the stock market is attentive to the news, it reacts depending on how it will be affected in the future. Another stimulus package to stimulate the economy would have direct implications for the stock market later this year.

“The stock market is forward looking and always anticipates or updates the future, looking six, nine, 12 months into the future,” Kass says. “The stock market therefore does not reflect the current situation, which at the end of March was very dark, very dismal, absolutely. But it was looking to the future. What will the economy look like next March, March 2021? “

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Looking back on the long 10 months of the pandemic, the stock market’s view of the future has remained constant and still positive. The Dow Jones hit a low below 19,000 towards the end of last March and has since found its way to near record highs around 31,000. Multiple factors contributed to the market’s rise, even facing high unemployment and a struggling economy.

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“You have a combination of accommodative monetary policy, stimulus fiscal policy and vaccine,” Kass says.

The initial lockdown last March essentially forced people to stay at home and shut down much of the economy. The government then had to plug this hole. The Federal Reserve has injected billions of dollars into the economy in an attempt to keep interest rates low. Falling interest rates encourage individuals and businesses to borrow, potentially increasing economic activity. The first stimulus package, the $ 2.2 trillion CARES Act, put money in the hands of consumers, just as the unemployment rate climbed nearly 15%. And then there was the now fulfilled promise of a vaccine, which would allow economic activity to return to some version of normal.

Another factor has also contributed to the bullish trend of the stock market. According to Kass, “because people were at home, they were unable to spend money on travel, tourism, entertainment, concerts, etc. You can’t spend it like you normally would. And a large chunk of the savings has been invested in investments. With interest rates kept near zero by the Federal Reserve, any investor trying to get a positive rate of return, as virtually any investor will, what is your best alternative to a bank savings account, CD? or a treasury bill? And, of course, the best alternative, a very easily accessible alternative, is the stock market, by investing in the market.

The events of last Wednesday may have had a dampening effect, but optimism for the future remains on the rise. “This is an attack on our democracy, our form of government,” as Kass describes it. “And what are the repercussions? It would certainly be a negative contribution, certainly adds some risk to the current situation. But presumably, at least immediately, it doesn’t seem to have an immediate impact on corporate profits or the economy, unless something gets worse and gets out of hand, which is unlikely.

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The upward trend in the market seems doomed to continue for a number of reasons. “The Federal Reserve promises this current enabling environment,” Kass says. “Best of all possible worlds, low interest rates. And corporate profits will improve as the economy picks up after the pandemic. They will experience very positive earnings growth going forward. Technology has greatly added to the output of the economy. I think the outlook is very bright for the next two or three years, and the stock market, essentially, reflects it.

>> READ: ‘Stimulus controls are least important’, when writing aid package, says economist

President-elect Biden has signaled that another stimulus package is imminent, and he likely has the votes in the House and Senate to deliver. “The stock market and the economy would benefit greatly,” says Kass. “And I think it’s more likely to happen in the near future.”

The president-elect also has a plan to build a more sustainable infrastructure, putting the country “… on an irreversible path to achieve net zero emissions, economy-wide,” as his campaign put it. It would stimulate the economy and create even more jobs.

Then there are several vaccines that will become more and more available. Initial distribution was slow, with a lack of coordination between federal, state, and local governments and the wary of receiving it. But public health experts believe vaccinations will increase. And economists suggest activity in the market will improve as the company nears collective immunity.

“I think the outlook [for the stock market] is very positive, ”says Kass. “I am very optimistic.”

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