Stocks have surged, not despite coronavirus but because of government responses to it. While many paint these stock gains as amoral reactions, they are rather straightforward market responses to government actions that have spiked national saving but limited its use. Put simply, money is going to Wall Street because there is nowhere else for it to go.
On February 13, 2020, the Dow Jones Industrial Average (DJIA) closed at 29,423. On February 12, 2021, it closed at 31,458. During this year America has endured global pandemic and Depression-worthy economic blows. This seeming disconnect has the appearance of not just trading on misery but profiting from it. How can the market be so up with the economy so down?
Just because the market has more than recovered does not mean that it did not fall. In the early days of the coronavirus panic it plunged too. On March 23, 2020, the DJIA closed at 18,591. Since plummeting in the first and second quarters, though, the economy has recovered some, even though unequally across sectors. The third and fourth quarters saw rebounds, and expectations are for continuing recovery in 2021. Additionally, accelerating vaccinations have buoyed hopes that the pandemic’s conclusion is close.
Still there are factors at work that economic statistics do not capture — namely government actions.
Nationally, Washington has infused massive amounts of money into the economy. Last year, five bills injected $3.9 trillion in just nine months. Currently, Congress is working on another $1.9 trillion bill. Additionally, the Federal Reserve has added another $5.6 trillion to the economy. Combined, that amounts to over half of U.S. GDP in under a year.
At state and local levels, government has imposed lockdowns. Clearly these have depressed economic activity. A recent USC academic study of coronavirus’s economic impact modeled three scenarios:
The major factor affecting the results in all three scenarios is the combination of Mandatory Closures and Partial Reopenings of businesses. These alone would have resulted in a 22.3% to 60.6% decrease in U.S. GDP.
Together, these government policies were intended offset: the former mitigating the latter’s impact. Yet they also had an unintended consequence: the U.S. private sector’s savings have surged.
Last February, U.S. consumers saved $1.4 trillion; in each month since, U.S. savings have surpassed that by at least 50 percent. Over the last 10 months, U.S. savings amounted to an incredible $17.8 trillion in savings above the February 2020 amount — an amount equal to 83 percent of GDP. If total savings are counted, the 10-month figure would be $31.8 trillion — roughly 150 percent of total U.S. GDP!
As the federal government poured resources in, they found reduced outlets at the state and local levels. This huge savings surge has few other productive outlets but the stock market.
Of course this does not mean the whole savings surge has gone to the market. As noted, there has been some recovery in the economy; still, it has been uneven. While goods — notably in the red-hot housing market — have largely rebounded, but services have not.
Unspent money must find a productive outlet. With the Federal Reserve keeping interest rates at historically low levels, savings accounts offer no appreciable returns. Because the pandemic and economic downturn are global, there are no foreign investment opportunities. After a year of quarantine, Americans largely have purchased the significant one-time goods they intended to buy. So, of course, savings have found their way to America’s stock market and driven up its value.
Causes will produce their effects, whether intended or not. Over the last year, the federal government has taken on debt that would have otherwise been private and given the public a massive cash infusion. At the state and local level, lockdowns have unquestionably produced economic hardship and simultaneously foreclosed the public’s spending opportunities.
Far from the heartless greed that some claim, the stock market’s recovery is evidence of the public sector’s massive intervention but the public’s limited opportunities. Both are directly attributable to government actions. As America has watched government at every level struggle to manage successfully the virus, there is also a cautionary reminder of its inability to manage the economy.
J.T. Young served under President George W. Bush as the director of communications in the Office of Management and Budget and as deputy assistant secretary in legislative affairs for tax and budget at the Treasury Department. He served as a congressional staffer from 1987 through 2000.
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