Light at the End of a Long Tunnel

We have all endured the Covid-19 pandemic for over a year now. And while a light at the end of the tunnel may be glowing, the stock market showed very few signs that the pandemic ever existed. The first quarter of 2021 was business as usual, with the S&P 500 gaining over 6%.

Over the past twelve months, equities have benefited from the massive amount of stimulus monies pumped into the US economy. The loose monetary and fiscal policy has supported various asset classes, from equity to real estate. The indiscriminate lending to businesses in March 2020 through the Paycheck Protection Program buoyed asset prices as the pandemic accelerated. The more recent America Rescue Plan will provide direct stimulus to consumers; the backbone of the US economy. Over the long-term however, we need to be mindful of the negative consequences fiscal leniency creates. The helicopter money could undermine the investment environment should the aggressive stimulus be inflationary or impact interest rates significantly. So what is the stock market telling us?

Biden vs. S&P 500

Prior to the pandemic the former administration looked poised to retain the White House. The economy was humming and a resolution in the trade war with China seemed forthcoming. Yet, the spread of Covid-19 changed everything. However, a shift in the political landscape barely registered in the US stock market. We have previously written how the resident of the White House should be well down on the list of investors’ concerns (click here) and yet again, the change in Washington is hard to discern.

Light at the end of a long tunnel S&P 500 image 1

Inflation & Gold

After two large rounds of stimulus, a jump in energy prices (due to problems in Texas and rising oil demand), an assault on the US democracy, global macroeconomic uncertainty, and a sizable pending infrastructure package, gold has done NOTHING. If inflationary pressures were building, spot gold would be the canary in the coal mine. Today, investing in gold is as easy and supposedly as liquid as your average ETF, yet the price action does not signal inflation nor show a flight to safety. The chart below displays the 1-year performance of Gold.

Light at the end of a long tunnel spot gold image 2

Wages & Unemployment

The second important measure of inflation that we monitor closely is wages. Labor costs are a key input for most businesses. As wage expense goes up, the prices of goods also rise as businesses seek to maintain and protect profits. Yet, hourly wages have remained stagnant. After a quick blip during the first round of stimulus programs, average hourly earnings continue to trend nowhere. This is likely due to the sudden jump in lockdown-related unemployment. With the US unemployment rate at 6.7%, it is hard to see wage pressure feeding overall inflation. It is also unlikely a $15 minimum wage can be implemented during an economic recovery. Interestingly, the US stock market tends to do well when unemployment is falling from high levels.