January Economic Update
The stock market closed the year with another solid rally in equities driven primarily by the rollout of multiple COVID-19 vaccines and the passing of the new fiscal stimulus relief bill by congress. The S&P 500 Index closed the month gaining 3.71% with the tech-heavy Nasdaq Composite increasing 5.65%. The Dow Jones posted a healthy rise of 3.27% but closed the year lagging behind the other two indices. (1)
After the November election, markets rallied in part due to initial results indicating divided control across the three branches of government which historically has been a positive for the equity markets. However, Georgia’s two Senate seats remained undecided and after a special election in early January and both democrats winning these seats, the Senate will no longer have a republican majority.
Many economic analysts are now predicting that a democratic controlled senate, house, and presidency may add another positive boost to the stock market. It is widely expected that democrats will be more willing and able to pass additional stimulus relief packages and infrastructure legislation which would spur increased government spending and help kick start the economy.
The Federal Reserve stated they will continue purchasing $120 billion in Treasury and mortgage-backed securities until substantial progress is made toward its inflation and employment objectives. Although the Fed has repeatedly indicated that achieving their inflation goals may not happen for several years, the stock market recovery and subsequent rally in 2020 has largely been attributed to the expectation of future inflation. (2)
Moving into 2021
The widening gap between the increases in the stock market, future inflation expectations, and low levels of actual inflation at the present time will be closely watched heading into the new year. With the economy still sputtering to reopen, consumers are less likely to be increasing their spending habits. Banks have also been tightened their lending standards which has slowed the issuance of new loans. These factors have continued to foster a low inflationary environment which the Federal Reserve is attempting to combat. While inflation may hurt our wallets by increasing the cost of goods and services, it is a necessary monetary force for our economic system to spur growth and support existing government and corporate debt obligations.
Vaccines are now being distributed and expectations are high that they will spur consumer confidence and kick-start the real economy and job market into re