Pandemic Savings + Government Stimulus: What It All Means For The Stock Market And Economy

The SPDR S&P 500 ETF Trust SPY is up more than 86% since the S&P hit its pandemic low in March 2020. While some investors are growing skeptical of the market’s expanding valuation, others argue the unprecedented conditions in the global economy have created a perfect storm for the stock market that may last for quite a while.

Elevated Savings Rate: RSM US LLP Chief Economist Joe Brusuelas said on Monday that more than $6 trillion in U.S. government stimulus spending has certainly helped support the economy and boost stock prices. However, elevated pandemic savings rates may end up being a longer-term tailwind for the economy.

Brusuelas said U.S. savings rates spiked 400% last April during the early weeks of the U.S. pandemic. Even 12 months later, U.S. savings rates are still 74% higher than pre-pandemic levels.

“We expect households to hold onto some of their savings until deeper into the recovery when employment is more secure and wages begin to rise on a sustained basis. The burst of spending will arise from an all-of-the-above combination of increased employment opportunities and government benefits, backed with the added security of accumulated savings,” Brusuelas said.

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Hyperinflation Concerns: Another factor that could have a significant impact on the scale and duration of the economic recovery is inflation.

Investors have piled into Bitcoin BTC/USD and other cryptocurrencies as flight-to-safety investments, anticipating the fact that the global money supply has grown by 40% since the beginning of 2020 will eventually lead to hyperinflation in fiat currencies. Hyperinflation could potentially trigger a spike in interest rates that would then weigh on economic growth.

Some observers have even drawn comparisons between the recent U.S. money printing and similar money printing Germany did in the 1920s to pay off its World War I debts. Germany’s stock market initially boomed, but its currency subsequently experienced hyperinflation that ultimately led to an economic collapse.

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Fortunately, the U.S. economy has digested the government’s money printing relatively well up to this point. In fact, the Federal Reserve is projecting Core PCE inflation of just 2.2% in 2021 and 2% in 2022, roughly in line with its 2% long-term target.

Benzinga’s Take: There have been plenty of economic cycles in U.S. history, but the current one is unique for at least two major reasons.

• All global economies will be recovering from the same downturn at the same time in 2021, which will be a first.
• The $6 trillion in U.S. stimulus spending is the largest stimulus effort in history by orders of magnitude, so it’s difficult for investors to look to history for direct comparisons.