Economic and Stock Market Commentary 01/18/21

Things are changing in Washington. First, Joseph R. Biden, Jr. has become President of the United States, after a bitter election and a tense aftermath. Then, there is the shift in Congress, where the Democrats hold a slim edge in the House of Representatives, and following victories in the Georgia runoffs, narrow control of the Senate.

Let’s look at what this all means for the financial markets. In the short run, control of Congress by the Democratic Party may lead to more generous fiscal stimulus proposals, including larger payments to families struggling because of COVID-19 and its consequent impact on employment and income. Longer term, it might lead to tighter regulations and selectively higher corporate and individual tax rates. The strength in the stock market so far in 2021 suggests that investors are now focusing on the potential for stronger economic growth evolving from greater fiscal support.

Meanwhile, after a likely slowing in economic growth in the just-ended quarter, we could see a further chipping away at the expansion in the current period. True, the recent pickup in manufacturing activity and gains in the non-manufacturing sector are encouraging. But the employment picture is sobering, with jobless filings rising and job totals declining in December for the first time since April. The downturn was especially severe in the troubled restaurant industry. For now, a double-dip recession appears unlikely, but not out of the question.

All the while worries about COVID-19 persist, with daily death counts surpass- ing 4,000 recently and the distribution of vaccines still frustratingly slow. That dour combination remains a possible headwind for a frothy stock market.

At this time, optimism about the economy later this year and concerns about high price-earnings ratios may be dueling views going forward. Such crosscurrents are indicative of the potential for further volatility in the stock market in 2021.

Conclusion: Clearly, the easy money in this long bull market has been made. That said, should the mass distribution of vaccines now proceed more rapidly, and the economy respond to new stimulus measures, investors may still see further gains. On that possibility, we would retain a good weighting in companies with positive earnings prospects.

Source: Valueline.com