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Trillions in Promised New Government Spending Boosts S&P 500

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The first week of January 2021 had a lot of action for the S&P 500 (Index: SPX), with political developments in Washington D.C. playing an unexpected role in boosting the index to a new record high on Friday, 8 January 2021.

For investors, the first big event came after the market closed on Tuesday, 5 January 2020, with the outcome of two U.S. Senate runoff elections in Georgia, which the Democratic party’s candidates won. The victories mean partisan control of the U.S. Senate will be held by the Democrats, who will functionally hold the majority through the incoming Vice President’s tie-breaking vote in the Senate after the new administration assumes office on 19 January 2021.

Combined with its narrow majority in the U.S. House of Representatives, the Democrats now control both the U.S. Congress and the White House, which means the party will be able to impose its preferred policies. For investors, that means higher taxes will likely be passed in the near term, which had prompted stock prices to drift lower as investors were increasingly focusing on the first quarter of 2021 in setting current day stock prices.

But, Democratic party control in Washington, D.C. also means greatly higher deficit spending, with the incoming Biden administration promising to pass trillions in new stimulus measures on Friday, 8 December 2021.

S&P 500 investors reacted in two ways to these events. First, the expected announcement of the economic package prompted investors to shift their forward-looking investment horizon toward the second quarter of 2021 during the week, which began boosting stock prices during the week. Second, the announcement of the trillions of new spending prompted them to boost their expectations for the S&P 500′s dividends throughout 2021, anticipating a large portion of the proposed new government spending will eventually end up in their pockets.

We have two charts that capture the effect of these two market-moving events. The first chart presents our first look at the dividend futures-based model‘s projections of the future for the S&P 500 during 2021-Q1.

Alternative Futures - S&P 500 - 2021Q1 - Standard Model (m=+1.5 from 22 September 2020) - Snapshot on 8 Jan 2021

This chart also shows the huge echo of the stock market’s volatility during the period when the coronavirus pandemic reached the United States a year ago. This echo effect is an artifact of the dividend futures-based model’s incorporation of historic stock prices as the base reference points from which it makes its projections of the future potential trajectories the S&P 500 may take depending upon how far forward into the future investors are focusing. We’ve tentatively added a redzone forecast period beginning on 19 February 2021 to compensate for the effect of the echo of past volatility on the model’s projections, which we’ll revisit and refine as we get closer to that anniversary.

The second chart is an animation showing how the expectations for future quarterly S&P 500 dividends per share changed from Thursday, 7 January 2021 to Friday, 8 January 2021 as a result of the stimulus announcement.

Animation: Past and Projected Quarterly Dividends Futures for the S&P 500, 2019-Q4 through 2021-Q4, Change from 07 January to 08 January 2021

Spread over the four quarters of 2021, the value of the S&P 500′s expected dividends per share rose by $1.18 from Thursday to Friday last week. If you know how the S&P 500′s index math works, and happen to know the index’ divisor, you know that’s a big deal, even with higher taxes in the offing.

Other stuff happened during the week, but these were the main market-moving news events. Here is our summary of the week’s more market-relevant headlines.

Monday, 4 January 2021
  • Signs and portents for the U.S. economy:
  • Fed minions set to stay on hold into spring:
  • Fed’s Bostic says bond-buying ‘recalibration’ could happen in 2021
  • Bigger trouble developing as China slows:
  • Factories bounce back from COVID-19 hit, tighter controls cloud outlook
  • Wall Street ends lower on worries over Georgia elections, virus surge
  • Tuesday, 5 January 2021
    • Signs and portents for the U.S. economy:
  • Fed minions
  • Fed’s Evans calls for possible revamp of U.S. financial regulation
  • Bigger trouble from COVID-19 developing in U.K. and Japan:
  • Wednesday, 6 January 2021
    • Signs and portents for the U.S. economy:
  • U.S. private payrolls post first decline in eight months as COVID-19 cases skyrocket
  • U.S. Capitol put on lockdown as pro-Trump demonstrators storm the Capitol
  • Fed minions thinking about ending QE bond-buying:
  • Bigger trouble developing in the Eurozone:
  • Dow, S&P 500 close higher, but pro-Trump protests weigh on gains
  • Thursday, 7 January 2021
    • Signs and portents for the U.S. economy:
  • Fed minions planning COVID QE exit strategy, see higher inflation coming, claim victory:
  • Fed’s Barkin says gusher of federal aid to economy ‘likely behind us’
  • Fed’s Daly: ‘Dangerous’ to pick one metric for full employment
  • Fed’s Evans says QE fate depends on inflation outlook
  • Bullard: Loose Fed, post-pandemic boom could set stage for higher inflation
  • Bigger trouble developing in Eurozone, India:
  • Wall St. tops new highs on Democrat-driven stimulus hopes
  • Friday, 8 January 2021
    • Signs and portents for the U.S. economy:
  • Fed minions see clear skies and few changes ahead:
  • Trillions in new stimulus funded by borrowing coming soon:
  • Unexpected positive sign in the Eurozone:
  • S&P 500 edges back from record high on doubts over bigger stimulus checks
  • Need more news to kick off the new year? Barry Ritholtz listed the positives and negatives he found in the markets and economics news during the first week of 2021 over at The Big Picture.




    Source: https://politicalcalculations.blogspot.com/2021/01/trillions-in-promised-new-government.html


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