It’s a puzzling paradox. The COVID-19 pandemic caused businesses to close. States went on lockdown, and millions found themselves out of work. The travel and hospitality industry was completely decimated, and a long list of retailers, restaurants, and small businesses went under.
Yet in the midst of all of this discouraging economic news, the Dow Jones Industrial Average (DJIA) and other market-related measures climbed.
On November 24, the Dow broke its all-time high record, closing at 30,046. How can it be that the stock markets soared while consumers and businesses struggled?
March 2020: The Market Crash
Just before COVID was identified in the US, the market was on its way up. On February 12, 2020, the Dow was at its highest ever – 29,551 – and economic experts were optimistic that it would soon break 30,000. All seemed lost when the U.S. found itself in the early days of a deadly pandemic.
Panic took over, and everyone – business leaders, consumers, investors, and lawmakers – prepared for the worst.
They couldn’t fathom a thriving economy with shuttered stores, grounded airlines, empty hotel rooms, and millions unemployed. The general sense was that bankruptcies would skyrocket and the market would collapse.
As expected, the bottom fell out, whether because of the panic or because of the pressure caused by the novel coronavirus. On March 9, March 12, and March 16, there were precipitous market drops that marked the three biggest point declines in history.
That’s where things took an unexpected turn. Instead of finding the bottom and staying there for a period before gradually inching up, the recovery was essentially V-shaped. Within weeks, markets were on a steep incline, and just six months later, they were stronger than ever.
This didn’t occur because the pandemic was fully extinguished or even under control. Vaccine distribution didn’t start in earnest until late December. How, then, is it possible that markets soared in 2020?
The Impact of Federal Action
When the lawmakers saw the extent of the economic damage – and the potential for widespread economic hardship – they immediately took action.
This was widely recognized as a positive moment for a Congress that had long been at odds over just about every major issue in recent years.
By March 26, they passed a $2 trillion coronavirus aid package that included cash payments for individuals, enhanced unemployment benefits, aid for state and local governments, loans and grants for businesses, and support for schools and health care programs.
Meanwhile, the Federal Reserve took action to stabilize the markets. Among other measures, it lowered interest rates, supported corporate bond markets, and purchased government debt.
The passage of the aid package and fast action by the Fed coincided with the upturn in market conditions, and many credit the government’s intervention for the nation’s rapid economic recovery.
However, some are taking a second look at the numbers and coming up with a different explanation – one that brings up the question of correlation versus causation.
Perhaps, they suggest, federal stimulus is simply correlated with the economic recovery, but the actual cause is something else entirely?
The Correlation Vs Causation Argument
Consider the difference between correlation and causation – a distinction that is often used in courtrooms nationwide.
There are many situations in which two events tend to happen at the same time, and in some cases, one causes the other (causation). However, it is quite common to discover that a third event is the actual cause of events one and two. In that case, the first two events are correlated.
The tobacco companies spent decades defending their products through causation vs. correlation arguments. Legal teams and advocates noted that yes, it was common to find that lung cancer patients were also smokers, but they said there was no evidence that cigarettes actually caused lung cancer.
Again and again, they won their cases because no one could prove causation. Of course, that winning streak didn’t last forever, and today causation has been firmly established.
With that in mind, 2020’s economic roller coaster might be related to federal stimulus – but there is also a strong possibility that the two are merely correlated, and a third set of facts shows the true cause of the rapid economic recovery.
Why Stock Markets Soared in 2020
Market experts point to a number of factors that might replace government stimulus as the true cause of soaring markets.
First, despite widespread unemployment, total income went up.
Second, total spending went down.
What happened to all of that cash? People put it into the stock market.
It’s hard to believe that total income went up, given the extreme hardship many families are facing, but the numbers don’t lie.
Yes, wages decreased by $43 billion, but other income more than made up for that. Enhanced unemployment benefits contributed $499 billion, and stimulus checks added $276 billion to personal income.
The Paycheck Protection Program ensured proprietors had $29 billion in income, and other types of income totaled $265 billion. Together that’s a stunning $1.03 trillion dollars available to consumers – an 8 percent increase year-over-year.
The number of jobs lost in 2020 is approximately 6.1 percent year-over-year, but income from employment came down just 0.5 percent.
That’s because the positions that were eliminated did not include high-paying white-collar jobs in significant numbers. It was low-paying retail and service jobs that disappeared. Millions might be unemployed, but collectively, they simply didn’t earn very much.
Meanwhile, with no trips to take, no restaurants to patronize, and no leisurely afternoons at the mall, spending decreased in a major way. That’s especially true for spending on services, which came down by $575 billion year-over-year.
Certainly, some industries benefited from an increase in spending, including a $60 billion rise in spending on durable goods. However, that small rise doesn’t begin to offset the decline in services spending.
All in all, more income and less spending left a sizable chunk of cash, which many put away in savings and investment accounts.
The total amount Americans chose to save increased by $1.56 trillion or 173 percent year-over-year, with a peak of 33.7 percent in April 2020. That is the highest savings rate recorded since 1959 – and certainly it is enough to spur serious upward movement in the stock market.
Weaker US Dollar
Finally, the current value of the US dollar against other world currencies may play a part in the appearance of strong market performance.
The dollar is growing weaker at the same time the Euro is strengthening and becoming comparatively more expensive.
When the performance of the DJIA is calculated in US dollars, it is at an all-time high. However, when it is calculated in Euros, its performance isn’t nearly as impressive.
In other words, some of the apparent market gains may not be due to the fact that securities became more valuable. Instead, it could be partially due to the fact that the dollar is comparatively less valuable.
2020 Market Performance: The Bottom Line
The bottom line is that from any perspective, including an economic perspective, 2020 was a year like no other. When all signs pointed to a sudden, lengthy recession or depression, the markets rallied. In a matter of months, they went from dramatic lows to all-time highs.
Some credit federal stimulus for preventing long-term market lows, but there are signs that this isn’t the whole story. Income increased for many Americans at the same time they stopped spending. That left a large amount of cash available for saving and investing.
A substantial number elected to put that money in the market, which in turn boosted its overall performance. When combined with the weakening dollar, those factors appear to have a direct cause-and-effect relationship with 2020’s rapid economic recovery.
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