How Will Increased Spending Affect the Economy and the Stock Market?

If a ball drops in Time’s Square but the public is not invited, then is it still New Year’s Eve?

In any event, the party on Wall Street raged on, with the S&P 500 gaining 1.43% to finish at a new record high. Profit-taking hit the small caps, as the Russell 2000 declined 1.45%, but still posted its best quarter ever. The dollar finished at a two-year low, gold inched up, and the yield on the Ten-Year Treasury dropped one basis point to 0.92%. Trading volume was light as investors turned their focus to bidding adieu to 2020.

The big news came over the previous weekend when President Donald Trump signed the $900 billion Covid-relief bill into law, ending four months of negotiating fits and starts. Attempts to further boost the payments failed to launch.

Thursday marked the end of trading in this very confusing and unusual year. On page B5 of Saturday’s New York Times there is a very insightful article; “Why the Markets Boomed in a Year of Abject Human Misery”. The article points out that rich people did much better than poor people, as most of the job losses were in lower-paying jobs. As such overall wages were only down fractionally. The big shocker was that total disposable personal income jumped $1.03 trillion, thanks to PPP, stimulus checks, and unemployment insurance benefits. That extra income was largely saved rather than spent; in fact, personal savings rocketed $1.56 trillion! Risk-free investments offered unattractive paltry returns, and so the money poured into the stock market.

As you plan for 2021, it is worth considering what will happen in the economy and in the stock market post-pandemic when household spending catches up with that increase in wealth. That spending could cause an unexpected jump in prices leading to increases in inflation and interest rates. The stocks that fared the best in 2020 might become vulnerable in that scenario. Small-cap value stocks and real assets, such as gold, could rotate into favor.

This Week:

Today, Georgia holds a special election for both its Senate seats. If the Democrats win both seats then they will take majority control of the Senate, which would dramatically change the landscape for enacting new government policies.

The tug of war between the distribution of the vaccines and the spread of COVID-19 will remain a dominant narrative throughout the week, month, and the foreseeable future.

On Friday, the jobs report for December will be released, with the consensus estimate calling for an increase of 114,000 in nonfarm payrolls. Approximately 10 million more Americans remain unemployed than a year ago, although about half the jobs lost in March have been recovered.

Stocks on the Move:

+11.6% Pitney Bowes Inc (PBI) sells, finances, rents, and services integrated mail and document management systems. The Company offers a full suite of equipment, supplies, software, and services for end-to-end mail stream solutions. There was no significant company news last week. PBI is a 1.0% holding in the North Star Dividend Fund and a 0.4% holding in the North Star Opportunity Fund.

 +14.4% Value Line Inc (VALU) produces investment related periodical publications. The Company also provides investment advisory services to mutual funds, institutions and individual clients. Publications include, “The Value Line Investment Survey,” “Value Line Select,” The Value Line Mutual Fund Survey,” and “The Value Line No-Load Fund Advisor.” There was no specific company news last week. VALU is a 0.8% holding in the North Star Dividend Fund.

Related: Predictions of a Theory of Behavioral Finance