The holidays are upon us, and we wish our clients and friends health, peace and happiness.
Recent income, output, and employment data have turned sour. We’ll see what that does to holiday shopping.
The financial markets, especially equities, have looked past the valley (abyss), and the vaccine news has enhanced the view that “normal,” or at least a “new normal” is just maybe a quarter or so away. The DOW set an all-time high (30,000+) this week.
Despite the narrative on Wall Street regarding the resurgence of inflation, it will be quite a while before bond yields can actually rise.
With the resurgence of the virus and new business restrictions in some districts, what happens to equity markets if the timing to the re-establishment of “normal” becomes widely recognized as several quarters away?
Temperature of the Markets
For most of the market’s history, at least until the new monetary policies adopted during the Great Recession, financial markets were somewhat tied to the underlying economy. Not that they didn’t deviate; they often did. We called these “bubbles.” Eventually, the bubbles burst and markets, once again, reflected economic reality. But since the Great Recession, central bank intervention into financial markets has suspended true market price discovery. And, now, it seems, even the Fed believes that it, alone, doesn’t have the tools to keep the economy afloat. For at least the past two months, Fed Chair Powell has asked the Congress to enact additional stimulus programs, and we now find that the policy making arm of the Fed, the Federal Open Market Committee (FOMC) is of the same view. Here is an excerpt from the FOMC November minutes:
“…several participants expressed concern that, in the absence of additional fiscal support, lower- and moderate-income households might need to reduce their spending sharply when their savings were exhausted…”
And: “…households appeared to be rapidly exhausting funds they received from fiscal relief programs…”
While markets have pinned hopes for a quick return to “normal” on the rapid distribution of the vaccine and acceptance of it by the American public (both of which remain a question mark), they have ignored the potholes between today and that herd immunity.
Turning a Blind Eye
Remember, the last fiscal stimulus package cost the U.S. government $3.3 trillion; and that only increased Q3 GDP by just over $400 billion. Without that stimulus, Rosenberg Research estimates that Q3 GDP would have fallen an additional -6% (on top of Q2’s -33%). And, remember too, out of the 160 million people in the labor force, more than 20 million remain unemployed (see chart above). While the markets believe that there will be another stimulus once Biden takes office, that event is still nearly two months away. And the wage gains that may currently be occurring…
Go to the news source: Priced For More Than Perfection, Markets Have Dismissed Economic Reality