The perplexing reality front and center in investors’ minds as we begin 2021 is how financial markets can be so unabashedly ebullient while the global economy is so terrible. How do we reconcile surging nominal asset prices and off-the-charts price-to-value measures with the presumed countervailing gravitational pull of economic despair, exacerbated by Covid-19, which now claims more lives daily at 4,000 than did the 9/11 terrorist attacks?

The answers lay in economic developments since the pandemic that are largely counterintuitive. To make the data more understandable, though, we introduce the common economic constraint ceteris paribus, Latin for “holding other things constant.” For simplicity’s sake, in hypothesizing about rising asset prices we will focus only on sources of the demand for financial assets, rather than sources of supply. A fuller accounting is much less straightforward. If a case can be made to support this abbreviated endeavor, it is that since physical capital and trained labor are significant variables in the supply of any good, the supply side is slower to respond to rapid change, such as we have experienced these last number of months.

In this time of acute economic travail, data from the Department of Commerce’s Bureau of Economic Analysis offer some surprising observations. The Bureau’s National Income and Product Accounts (NIPA) reveal how Americans earn and spend their incomes. From March through November—the latest available data coincident with the pandemic—Americans saved like never before. Over that period, personal savings were $1.56 trillion higher than in 2019, an increase of 173%. The savings rate, which historically averages around 7%, soared to almost 34% in April.[1]

A Surprising Rise in Income

To be sure, these dollar amounts are aggregations. The rise in savings among those who avoided significant economic damage from the pandemic, on average also the highest earners, dwarfed the dissavings of the millions who were hardest hit.

Not unexpectedly, a portion of this savings headed straight to the proverbial “mattress”: currency in circulation shot up to $260 billion, an increase of 14% since March, and bank deposits rose by 19%. Another more opportunistic portion was expended in buying homes. Despite the business slump, the S&P CoreLogic National Home Price Index rose by 8.4% over the 12 months ending in October. All told, however, the portion of personal savings that bid up the prices of financial and real assets since the pandemic is beyond remarkable.

Three Driving Causes

Now, let’s back into the pandemic-related circumstances that led to the most unusual and largely unexpected boom in savings. First, while the number of jobs has declined 6% since March, employee compensation shrank only 0.5%. This can be traced to the type of jobs lost. The vast majority of those laid off were lower-wage workers in the service sector.

Secondly, we add transfer payments to arrive at Total Personal Income (TPI). Since the Covid-19 outbreak in late January 2020, TPI actually increased even though wages fell. State and federal unemployment insurance programs boosted TPI by $499 billion over the same period in 2019. The $1,200 individual checks from the CARES Act contributed a further $276 billion to personal income—much of which accrued to families that did not experience a drop in earnings. The Payroll Protection Program (PPP) prevented a collapse in “proprietor’s income” of $143 billion. All told, because of the stimulus payments, American’s after-tax income was $1.03 trillion greater from March through November 2020 than in 2019, an increase of 8%.

Finally, Personal Consumption Expenditures (PCI) fell by $575 billion, 8%, compared to the prior year’s level. As consumers stayed home, spending on services collapsed and the purchase of goods did not begin to offset.

The Empty Narrative of Fed Support

For a final surprise, in our view the Fed did fairly little to directly boost equity prices during the pandemic. Further, it has failed to spur new bank lending despite a surge in bank reserves. Indirectly, though, its ongoing narrative of “doing whatever it takes”—which we interpret as the indefinite continuance of the Greenspan put—has certainly encouraged speculation by those least qualified to do so.

We conclude with perhaps the ultimate in pandemic ironies. A far from insignificant amount of the funds ostensibly directed toward relieving human misery through the CARES Act has pushed asset prices higher. By temporarily moderating income disparity, the original intent of the law, it greatly expanded wealth disparities, a persistent consequence of attempts at economic engineering. Thus, the behavior of the market is, in fact, not wholly detached from the economy. Unfortunately, the damages inflicted on the private sector by the pandemic and policy responses are more enduring than the Band-Aid of the CARES legislation. Continued high unemployment will depress TPI in the future absent further government action. Transfer payments were steroids to income in the short-term but long-term earning potentials were severely damaged and require an arduous recovery to regain their former strength. Markets have yet to reckon with that reality.


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