Weekly Update

A Spike in Savings Drives the Stock Market Rally

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Published January 22, 2021


One reason for the surging stock market recovery over the past nine months, despite extraordinary unemployment, has been the shift from spending to saving among a broad swath of the population. The article below from Delta tells the tale:

“There is a high probability the 2020 COVID-19 economic shock will be officially sanctioned as a recession by the National Bureau of Economic Research (NBER). But being awarded this title does not mean it was similar to previous recessions.

In 2020, there was a significant decline in economic activity spread across the economy, lasting more than a few months, visible in real GDP, real income, employment, industrial production and wholesale-retail sales. Bada bing, Bada boom recession.

On the other hand, the personal savings rate jumped from 7.2% in December 2019 to 12.9% in March 2020. By April 2020, the savings rate topped 33%. The savings rate has never been higher dating all the way back to the start of 1959.

Personal savings rate jump

Many individuals and businesses have been adversely impacted by the COVID-19 recession. In aggregate, however, real household net worth climbed during this recession as a result of strong housing and stock markets and distributions of government aid.

Real household net worth climbed

The magnitude and speed of the government’s financial response to this recession is unprecedented. Global asset manager, Guggenheim Investments, is forecasting another 5.6% of GDP of fiscal stimulus will be passed this year. Investment bank, Goldman Sachs, increased its U.S. GDP forecast twice already this year from 5.9% to 6.4% to the current 6.6% driven by President Biden’s $1.9 trillion stimulus plan.

Many prior recessions involved financial structural issues like prolonged, restrictive monetary policy and/or financial imbalances (asset bubbles) that took years to unwind. The 2020 COVID-19 recession was different. The economy was generally in good shape just prior to the recession. The recession was caused by mass business shut-downs. As the economy reopens, the expectation is the economy will recover at a rapid pace as structural issues do not need to be resolved. Two examples of this are the capital markets never shut down allowing distressed, large businesses to access capital and there was never a concern we might experience major bank failures.

We are just beginning earnings season. So far through January 19, 56 companies in the S&P 500 have issued positive earnings guidance. This is the highest number of S&P 500 companies issuing positive earnings guidance since FactSet began tracking this data in 2006.”

Market Update

Coming back from a Monday holiday, stocks resumed their two-month climb with a +0.8% lift. Incoming Treasury Secretary Yellen told Congress she supports more stimulus spending for workers and businesses affected by the coronavirus. Oil prices continued their recent climb as a Saudi-Russia agreement supports prices, which now trade above $50 per barrel and back to their pre-pandemic trading range. Bank earnings came in strong though shares generally failed to rally on the reports. A blockbuster earnings report from Netflix (NFLX) sent the Nasdaq +2% higher Wednesday as investors rotated back into tech/consumer stocks. That trend continued Thursday with another +0.5% rise for the index while the rest of the market traded flat. Friday brought muted trading and little change with earnings reports from Intel (INTC) and IBM providing a downbeat note.

The broad market S&P 500 (SPY) rose +1.91% on the week with the Nasdaq 100 (QQQ) receiving more enthusiasm to deliver a +4.35% return. Smallcap stocks (IWM) rose +2.02% this week to run their winning streak to an amazing 11 out of the past 12 weeks.

Warm wishes and until next week.