Last night, we received news that President Trump signed a Covid relief bill and the market is starting to show some strength from this news. A common question we got from clients last week was: “Why didn’t the markets re-act more positively to the news with Congress passing the bill?” There are two possible reasons for this. The first reason is that the markets were pricing in a $2 trillion stimulus while a $900 billion stimulus was viewed by some as underwhelming. The second was we are in the middle of re-balancing season in investment funds. This is where managers are re-aligning their positions and taking money out of equities and putting them into bonds. In fact, up to $85 billion will be moved from equity positions to bonds for end of the year re-balancing. Hopefully, the signing of the relief bill will give us the momentum we need coming off a unique and volatile year of 2020.
Consumer & The Economy
The relief bill is important for the consumer and the economy. However, it is less impactful for the markets. Now, why do we think this? Since the beginning of the Covid crisis we saw a spike in consumer savings from people staying home. Also, we saw stimulus checks early on which gave an increase to personal income and savings. Since then, we have seen savings start to drop. While it’s still elevated on a historic level, it’s been dropping quickly. So, this relief bill is huge for the consumer to continue to have free cash flow to either save or spend to boost the economy. However, this is not as impactful to the markets as one might think.
It’s widely talked about and often quoted on our vlogs that the consumer makes up 70% of the economy. The consumer-facing companies only make up about around 19% of the markets market cap and only 16% of the stock market’s earnings. So, while the consumer is important for small businesses and the economy it’s not nearly as important for big businesses in the stock market. This is why you have seen the stock market rally over the last few months despite not having a stimulus bill because big businesses are thriving on a global scale while small businesses are hurting. This makes up the dislocation of the markets. This is what distinguishes the economy from the stock market and explains the bifurcation. In 2021 hopefully we will see more of a turnaround in the economy and a continuation of the upside of the markets that really tie to our clients’ individual savings and portfolios.
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
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