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How America Fueled Financial Markets During the COVID-19 Pandemic

One of the biggest paradoxes in the pandemic is the resilience of the world’s largest economy. Also, the strong bounce of financial markets from the lows (i.e., stocks, gold, oil, etc.) remains a mystery to many. 

However, a close look at how America funded the crisis explains the relentless bid behind financial assets. In particular, it explains why the stock market bounced and why it is likely to remain elevated during the pandemic.

Huge Rise in Savings

One of the first things the United States did was to issue the CARES Act. The program offered unemployment insurance benefits of $500 billion. Next, it sent checks to every individual, worth in total another $276 billion. Finally, using various other income schemes, it sent to households another $265 billion. All in all, the total disposable personal income (i.e., income remaining for spending after all taxes are paid) deployed exceeded $1.03 trillion.

Faced with so much cash, households did what households do during a crisis – increase their savings. The jump in the savings rate has two explanations—first, the rise in disposable income. Second, the decrease in spending.

Lower interest rates also helped. By easing the monetary policy, the Fed managed to lower the interest burden of each household.

With plenty of cash at hand, the American investor did what it knows best – buy stocks. Social media and the easiness of opening a trading account also helped. Moreover, fractional shares trading made it possible to own a fraction of a company without even owning one full share. One can invest as low as $5 in a share of, say, Amazon. Based on the market price, the trader will have in the account a corresponding fraction of a share.

Naturally, this increased market participation and price discovery. We can say that America became a nation of investors overnight, as TikTok, a popular social media channel among teenagers, is full of gurus giving advice on how to invest the “stimmy” – a nickname for the government’s stimulus checks.

This may look funny, and it is. But it explains the frenzy and the bid behind the U.S. stock market. And more stimulus is about to come.

Goldman Sachs estimates that the Democratic win in Georgia will bring another $160 billion in the form of state and local aid, an extension of unemployment benefits until the end of 2021, more checks, and even additional benefit programs. All in all, about 2.7% of GDP or $600 billion in fiscal support.

How much of it will end up invested in the stock market? Probably a lot.

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