Ready for Liftoff
The stock market can sometimes turn on a dime. It can also turn on six trillion dollars.
That’s the story of the last twelve months. The pandemic sparked the sharpest bear market in history. Then, after bottoming last March 23rd, stocks rebounded and hardly looked back. The ensuing one-year gain was the largest in seventy-five years.
Unprecedented government stimulus is to thank. This includes injections of capital into the markets by the Federal Reserve, as well as $6 trillion in new fiscal stimulus, including the $1.9 billion American Rescue Plan Act signed last month. The amount of stimulus is unlike anything America has seen, dwarfing the government response to previous crises this century (left chart below).
Of course, stimulus won’t do much good if the economy is unable to re-open due to the pandemic. But progress on vaccines means that, at least in the U.S., the economy is ready for liftoff. More broadly, the success of the vaccines speaks to the creativity and resilience of America and its ability to overcome even the most desperate circumstances. Moderna, based in Massachusetts, developed its vaccine in a mere forty-three days, with the first test doses administered on March 16, 2020. Even before the market bottomed last year, the seeds of recovery were sown.
In terms of the market outlook, there may be danger in overthinking it. The combination of vaccines, stimulus, and a re-opening economy ought to be positive for stocks. Economists predict the economy will grow 7% this year, which would be one of the highest rates of growth since World War II. Stocks have been positive in nearly 90% of years when the economy expands.
Meanwhile, last year’s investor fears about the election and COVID have been supplanted by new worries: higher inflation and taxes. Ironically, one year after investors fretted over the possibility of a new Great Depression, there are fears that so much stimulus is “too much of a good thing” and that the economy could overheat. While these concerns have merit, we believe they are premature. When it comes to stimulus during a pandemic and in the early stages of an economic recovery, actress Mae West may have said it best: “Too much of a good thing can be wonderful.”