Trillions in Promised New Government Spending Boosts S&P 500

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.

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.

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:

• Oil slides with U.S. stocks as OPEC+ delays output decision
• U.S. construction spending races to record high in November
• U.S. final manufacturing PMI ends 2020 at six-year high: IHS Markit

Fed minions set to stay on hold into spring:

• Fed’s Evans sees long period of accommodative monetary policy

• Fed’s Evans says monetary policy ‘well-positioned’ now
• Fed’s Evans says will look for recovery dynamics in spring

Fed’s Bostic says bond-buying ‘recalibration’ could happen in 2021

Bigger trouble developing as China slows:

• China’s Dec factory activity growth slows, higher costs hit firms

Factories bounce back from COVID-19 hit, tighter controls cloud outlook

• Canadian manufacturing activity increases at a record pace in December
• Euro zone manufacturing ends 2020 on high as German factories hum -PMIs
• Asian factories bounce back from COVID-19 hit, tighter controls cloud outlook
• Japan snaps 19-month decline in factory activity in December – PMI

Wall Street ends lower on worries over Georgia elections, virus surge

Tuesday, 5 January 2021

• Signs and portents for the U.S. economy:

• Oil prices jump 5% on OPEC+ output talks, Iran tension
• U.S. bankruptcy filings hit 35-year low thanks to government pandemic aid
• U.S. factory activity approaches 2-1/2-year high; COVID-19 hitting supply chains

Fed minions

• Fed’s Mester says outlook calls for asset purchases to stay steady in 2021

• Fed’s Mester says policy will stay accommodative for ‘quite some time’

Fed’s Evans calls for possible revamp of U.S. financial regulation

Bigger trouble from COVID-19 developing in U.K. and Japan:

• UK goes into COVID-19 lockdown – at what cost?
• Japan’s state of emergency seen triggering first-quarter economic contraction

Wednesday, 6 January 2021

• Signs and portents for the U.S. economy:

• Oil rises to 10-month high after Saudi output cut, U.S. inventory draw
• Georgia results could pave way for quick additional U.S. pandemic support

• U.S. Sen. Schumer says Democratic Senate to make $2,000 stimulus payment top priority
• Rates Are Blowing Out: A 1% Increase In 10Y Yields Will Slash P/E Multiples By 18%

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:

• Fed says changes to bond-buying hinge on ‘qualitative’ call on economy
• FOMC Minutes Show Fed Discussing 2013-Like Taper To Bond-Purchases

• The Fed is Juicing Stocks

Bigger trouble developing in the Eurozone:

• Euro zone contraction deeper than thought in December but optimism rose

• Euro zone producer prices fall less than expected year-on-year in November

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:

• Oil hits 11-month highs on Saudi cuts, shrugs off U.S. turmoil
• U.S. weekly jobless claims unexpectedly fall
• U.S. labor market recovery stalling; trade deficit widens sharply
• U.S. service sector regains speed in December – ISM survey

Fed minions planning COVID QE exit strategy, see higher inflation coming, claim victory:

• Fed sees rising bond yields, inflation expectations as a possible win
• Fed’s Harker says he doesn’t expect to taper bond purchases until late 2021, early 2022

• Fed’s Harker says he expects growth to slow before rebounding later this year

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

• Fed’s Evans says probably 2024 before rates start to rise

Bullard: Loose Fed, post-pandemic boom could set stage for higher inflation

• Fed’s Bullard expects ongoing economic recovery as vaccines take hold

Bigger trouble developing in Eurozone, India:

• Euro zone data point to fourth quarter GDP drop: ECB
• India predicts GDP 7.7% contraction, likely to prompt steps to boost growth

Wall St. tops new highs on Democrat-driven stimulus hopes

• Investors reposition for stimulus, spending and tax as they look to Biden

Friday, 8 January 2021

• Signs and portents for the U.S. economy:

• This is not our fault’: Pandemic job losses fall hardest on hospitality workers
• Oil rises to highest since Feb, set for weekly gain on Saudi output cut

Fed minions see clear skies and few changes ahead:

• Fed’s Clarida: “Hopeful” U.S. can move past events of this week

• Clarida says expects to keep pace of bond purchases through this year
• Fed’s Clarida sees ‘impressive’ year ahead for U.S. economy

Trillions in new stimulus funded by borrowing coming soon:

• Biden says economic package will be in the trillions of dollars

Unexpected positive sign in the Eurozone:

• Euro zone unemployment rate surprises with November decline

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.