Why did stocks rise amid chaos?
In a five-day period that saw the Senate flip to Democrats, chaos on Capitol Hill after a scary insurrection, discussions of a second impeachment of President Donald Trump or invocation of the 25th Amendment to remove him from office, new horrendous daily death tolls from the pandemic, and a disappointing monthly jobs report, US stocks somehow managed to rise in value. What gives?
The recitation of those facts may have caused some of you to consider pushing the sell button, but investors that I have spoken with over the past few weeks, seem to believe that the aftermath of the violent attack on Congressional lawmakers will dissipate and a Biden administration will restore order. And while the resurgent spread of COVID-19 is alarming, the view is that vaccine dissemination and adoption will control the virus over the course of the next six to nine months.
Oddly, the one area of investor concern that cropped up in the first week of January was the December employment report. For the first time since April, the US economy lost jobs — 140,000 of them to be exact — and the unemployment rate remained at 6.7%, as the labor force and number of people unemployed increased minimally. The anemic December result capped off the worst year for the labor market since World War II, with more than 9.8 million jobs gone since COVID-19 arrived in February.
The losses were led by a massive 498,000 drop in the leisure and hospitality sector, as restaurants, bars, hotels, and entertainment facilities closed in response to the surge in coronavirus infections. As economist Joel Naroff put it: “When you shut things down, jobs disappear, it’s that simple.” Additionally, state and local governments cut 45,000 positions, which could be the first wave of layoffs that could occur as a result of budget constraints, unless fresh money flows from the federal government.
So, is it time to crawl into a ball and prepare for another terrible period for the labor market and the economy overall? Not so fast. There were areas of strength in the December report, including a healthy rise in professional and business services, manufacturing and retail. While the gains were not enough to offset losses, December may not be the beginning of another massive wave of layoffs. “It doesn’t look like we will be getting many, if any, additional negative numbers going forward, and once the latest virus surge eases, sometime in the future, and the restrictions start being lifted, we could see some months of very strong job gains,” says Naroff.
But any near-term pickup that we could see may be short-lived, because until a large portion of the nation is inoculated, there will continue to be pressure on the economy. That’s why there is renewed call for additional stimulus, for both individuals and municipalities. Diane Swonk, Chief Economist at Grant Thornton believes that herd immunity and a full reopening of the US economy “is still a long way off, which underscores the need for aid today and another tranche once the new administration takes office … the magnitude of the rebound in growth will depend heavily on our ability to repair and restore incomes
for those hardest hit by the crisis.”
The likelihood of more help for the hardest hit has increased significantly, after the results of the two Georgia senate runoffs. Investors were more focused on that idea, as well as the fact that the Federal Reserve intends to keep interest rates at zero for the foreseeable future, rather than the violence at the Capitol and the surge in COVID-19 cases.
As perverse as it may seem, long term investors can push stocks higher amid a sobering week for the nation.