Understanding the market in 2021
What you need to know to build your stock portfolio
How does government spending move markets?
The main goal of an economic stimulus package—such as the
$2.2 trillion CARES Act, which passed in March 2020, during the early days of the Covid-19 pandemic—is to get much-needed funds to businesses and citizens, who will then presumably put that money back into the economy by spending it. The stock market is speculative in nature—it’s always looking to the future—which is why any serious hint of a stimulus package on the horizon can wind up boosting stocks. This is also why stocks sometimes rise on bad economic news: That raises the chances, and potentially the size, of a new stimulus package. Last year, stocks frequently jumped when monthly unemployment claims rose, because to investors, the dismal jobs numbers implied more government aid was likely.
What’s the role of the Fed and ultralow interest rates?
In times of economic crisis, the U.S. Federal Reserve takes action to keep interest rates low, as a way of encouraging borrowing, spending, and investing. You’re more likely to buy that car or get that mortgage when rates are extremely low. One of the biggest economic stories of 2020 was Fed activity. The Fed not only lowered the rate that banks pay it to borrow money to near zero, but also indicated that it will remain extraordinarily low for several years. The Fed generally starts to raise rates when it senses inflation might be on the horizon, but this recent guidance suggests that they will hold off on doing so until the economy has fully recovered and the unemployment rate (which remains very high, market gains notwithstanding) has significantly improved. Rock-bottom interest rates mean that investors get lower returns from bonds—which are essentially loans to corporations or to the government itself—and so they tend to move their money into the stock market, raising share prices across the board.
Is Big Tech fueling the market boom?
Yes and no. One of the most notable phenomena of the pandemic was the powerful rise of a handful of tech giants. The wild swings in the market last spring saw the NASDAQ, which reflects the performance of technology shares, rebound from the February