A Closer Look at Why Markets Soared in 2020

By Jake Willms, Quantitative Analyst

The market whipsaw that occurred in March of 2020 will be remembered and studied for many years to come. As millions of Americans lost their jobs and small businesses were forced to adapt to social distancing measures, the stock market recovered quickly and a new bull market began.

The labor market’s response to the Covid-19 pandemic was almost as surprising as the stock market’s. For instance, aggregate employee compensation is only down 0.5% since March. What is going on here?

Even though millions of Americans lost work, the majority of these lost jobs were low-paying service jobs. Higher-paying jobs were less vulnerable because those jobs tend to be sectors that were less harmed, and in some cases benefited from, the economic changes brought on by the pandemic.

Despite the critics suggesting otherwise, it’s clear that the CARES act had an extraordinary impact on lower income Americans. As the following chart illustrates, the blue-collar workers received a significant share of the Covid-19 related governmental assistance.

After factoring in all of the government aid, American after-tax income in 2020 was over one trillion dollars higher than in 2019. At the same time, Americans tightened up their wallets and adjusted their spending habits in response to the pandemic, with the services industry being hit the hardest due to restrictions on social interaction and travel. Think restaurants, concerts, and vacations.

In summation, the net impact of personal income and spending is +$1.56 trillion of unspent household income. One of the consequences of this massive increase in spending power was a tidal wave of investing. People poured money into the stock market and real estate. All of the new money that has poured into the stock market has resulted in record high equity valuations. In uncertain times like these, such high valuations are especially problematic. Therefore, caution and restraint may be warranted.

This topic and the charts pictured above was first covered by Neil Irwin and Weiyi Cai of The New York Times here.

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