Why markets boomed amid misery

The central, befuddling economic reality of the United States at the start of 2021 is that everything is terrible in the world, while everything is wonderful in the financial markets.

It’s been a macabre spectacle. Asset prices keep reaching new, extraordinary highs, when around 3,000 people a day are dying of the coronavirus and 800,000 people a week are filing new unemployment claims. Even an enthusiast for modern capitalism might wonder if something is deeply broken in how the economy works.

(For the record, the S&P 500 gained 16.3% in 2020, the Dow 7.2% and the Nasdaq 43.6%, which was the biggest yearly gain for the tech-heavy index since 2009.)

To better understand this strange mix of buoyant markets and economic despair, it is worth turning to the data. As it happens, the numbers offer a coherent narrative about how the US arrived at this point.

Income: Monthly data from the National Income and Product Accounts captures how Americans earn and spend, two activities drastically altered by the virus. The first key observation: Salaries and wages fell less than most people might think. Total employee compensation was down only 0.5% from March through November, more akin to a mild recession than an economic catastrophe.

That might seem impossible. Large swaths of the economy have been shut down; millions are out of work. The number of jobs employers reported on their payrolls was down 6.1% year-on-year in November.

So how can jobs be down 6% and compensation only 0.5%? Consider which jobs have been lost. The millions no longer working because of the pandemic were disproportionately in lower-paying service jobs. Higher-paying professional jobs were more likely to be unaffected.

Then there was the coronavirus relief bill passed in late March. The degree to which it helped support incomes, especially those who lost jobs, was extraordinary.

Americans’ income from unemployment insurance benefits was 25 times higher from March through November 2020 than in the same period of 2019. That partly reflects that millions more jobless people were seeking benefits, of course. But it also reflects a $600 weekly supplement that the act included through late July — along with a programme to support freelance and contract workers.

In total, unemployment insurance programmes pumped $499 billion more into Americans’ pockets from March to November than the previous year; $365 billion of that total was a result of the expansion in the relief bill.

The $1,200 cheques to most US households that were included in that legislation contributed a further $276 billion to personal income — much of which accrued to families that did not experience a drop in earnings.

When it’s all tallied up, Americans’ cumulative after-tax personal income was $1.03 trillion higher from March to November of 2020 than in 2019, an increase of more than 8%. But income also is only part of the story.

Spending: On the consumption side, we see a pattern that may seem obvious now but was not as easy to predict while the economy was collapsing. The obvious part was a decline in spending on services. All those restaurant reservations never made, flights not taken, and sports and concert tickets not bought added up to serious money: a drop of $575 billion, or 8%.

Less obvious were some of the other patterns. Americans spent meaningful dollars on stuff. Durable goods spending was up by $60 billion (a better chair for working from home, or maybe a new bicycle), while non-durable goods spending rose by $39 billion (think of bourbon purchased to drink at home that normally would have been logged as “services” consumption in a bar).

But not only were households, on aggregate, taking in more money, but they were also spending less of it. Total outlays fell by $535 billion.

Saving: This combination of soaring income and falling spending pushed Americans’ savings rate through the roof. From March through November, personal savings were $1.56 trillion, or 173%, higher than in 2019.

Even as millions faced great financial hardship, Americans on aggregate were building savings at a startling rate. It had to go somewhere. But where?

Holding on to extra cash was one option — currency in circulation jumped by $260 billion, or 14%. Deposits in commercial banks are up 19% from the first week of March. For those more comfortable with risk, there were stocks, which helps explain the 16% rise in the S&P.

Or you could have used the occasion of the pandemic to buy a new house. Home sales surged — the S&P CoreLogic home price index was up 8.4% in October from a year earlier.

Essentially, the rise in savings among those who have avoided major economic damage from the pandemic is creating a tide lifting the values of nearly all financial assets.