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Foster Denovo|News & blogs|News|Market briefing (no. 31) – 15th March 2021

Market briefing (no. 31) – 15th March 2021

Three sides to a story

A father once said, “son, always remember that there are three sides to a story.’

All conversations are remembered differently by the those having them. There is likely ‘one truth’ but no-one will ever really know what that is.

Often, one person isn’t right and the other wrong; it’s just whilst they are listening to the same words, it’s human nature to hear different things.

No matter which side of the debate you are on from a UK constitutional or human standpoint, including having no opinion at all, it is very sad to see a family at war with itself. Over time cooler heads will ideally prevail, where they’ll be able to resolve their differences.

The events surrounding ‘the interview’ are very unlikely to impact financial markets. Recent events in the US, however, do. Let’s review how.

Records broken across the pond

Major U.S. stock-market benchmarks saw records last week as US President Joe Biden signed a bill providing $1.9trillion (that’s $1,900,000,000,000) of financial aid to boost the US economic recovery from the pandemic.

Putting all those noughts into context is difficult so let’s compare against two historic – and enormous – US financial aid packages; Roosevelt’s ‘New Deal’ in 1929 in response to the Great Depression, and Obama’s ‘Recovery Act’ in 2009 in response to the so called Great Financial Crisis that began in 2007.

Academics state that due to the different conclusions that can be drawn, it is impossible to draw specific parallels. However, comparing two statistics does show the enormity of Biden’s aid package, but also shows the enormity of previous aid packages.

Roosevelt’s 1929 New Deal

When inflation is applied, the 2021 value of the 1929 ‘New Deal’ was worth $817billion(1) in today’s terms.

Putting this in context, Roosevelt’s economic boost was equivalent to 40%(1) of the US’s economic output (gross domestic product; GDP) in 1928.

Obama’s 2009 Recovery Act

When inflation is applied, the 2021 value of the 2009 ‘Recovery Act’ broke the $1 trillion barrier(1) in today’s terms and is worth $1.051 trillion.

However, putting this in perspective, Obama’s economic injection was equivalent to just under 6%(1) of the US’s economic output in 2008; significantly lower than Roosevelt’s stimulus 8 decades before in terms of the % of gross domestic product (GDP).

Biden’s 2021 stimulus

No inflation adjustment is needed for Biden’s stimulus as it is happening now.

As mentioned, the value of the 2021 stimulus is an enormous $1.9 trillion; in UK sterling terms this is the first time it has exceeded £1trillion pounds sterling(2).

However, putting this in context with the ‘New Deal’, Biden’s stimulus was equivalent to just over 9%(1) of the US’s economic output in 2019(3); still significantly lower than Roosevelt’s stimulus 90 years ago in terms of % GDP(1).

How have markets reacted?

Irrespective of comparisons with history, the 2021 relief package has been designed to support the American economy against the effects of Covid, but it also gave Wall Street a significant nudge.

When converted into pounds sterling, the £1.36 trillion(2) stimulus package will send out cheques to almost 160 million Americans, valued up to just over £1,000(2) each. It will also increase unemployment benefits.

This enormous injection of cash directly into the economy has fuelled fears of renewed inflation amidst the pandemic recovery.

This has caused unease and recent volatility in equity markets and US government bond yield to spike upwards. However, these fears have lessened, at least for now, following a fall in weekly unemployment claims increased prospects of a job market recovery.

The Dow Jones Industrial Average

The Dow Jones Industrial Average is one of the oldest market indices in the US still in existence and covers 30 large, publicly-owned companies(4).

After an intraday all-time high at 32,661 points (in Dollars terms), the Dow Jones Industrial Average rose 188.57 points, or 0.6%, closing at a record of 32,485.59 points.

This record close is one of a dozen record highs since the turn of the year.

Source (5) Market Watch

Although the record highpoint is newsworthy, context is important. As the graph to the left shows, the Dow Jones (shown here in £GBP terms) has recovered since the bottom of the bear market over a year ago.

Although that is good news, clearly the returns have been conservative when compared against the technology heavy S&P 500 index.

Source (6) FE Fundinfo

What should this tell you?

Irrespective of broader news, even headlines that discuss important international economic matters such as US President Biden’s stimulus, and remembering that “past performance is no guide to future returns”, from an investment perspective, investors should have a balanced, longer term view.

As we have said before, we will continue to monitor the current financial situation and keep you notified of any changes that are made. If you would like to discuss how the current situation might affect you, then please seek professional financial advice to discuss your financial situation further.

This week in history …

11th March 1988 – Bank of England £1 note ceases to be legal tender.(7)
12th March 1969 – Paul McCartney marries Linda Louise Eastman in London.(8)
13th March 1948 – Ireland beats Wales, 6-3 at Ravenhill Stadium, Belfast to clinch the Five Nations Rugby Championship and their first ever Grand Slam.(8)
13th March 2013 – Papal Inauguration of Cardinal Jorge Mario Bergoglio is elected the new pope, taking the papal name Pope Francis.(8)
14th March 1990 – Mikhail Gorbachev becomes president of the Soviet Congress.(8)
15th March 44 BCE – Assassination of Julius Caesar.(8)
16th March 1976 – Prime Minister Harold Wilson announces his resignation.(8)
17th March 432 – Aged about 16 the future St. Patrick is captured by Irish pirates from his home in what is likely modern-day Wales and taken as a slave to Ireland.(8)
18th March 1978 – Wales beats France, 16-7 at Cardiff Arms Park to clinch its 20th outright Five Nations Rugby Championship, a record 8th Grand Slam and record 3rd consecutive Triple Crown.(8)

Sources

1. https://www.stlouisfed.org/publications/regional-economist/first_quarter_2017/the-recovery-act-of-2009-vs-fdrs-new-deal-which-was-bigger

2.  https://www.xe.com/currencyconverter/convert/?Amount=1&From=USD&To=GBP

3.  https://data.worldbank.org/country/united-states

4.  https://www.investopedia.com/terms/d/djia.asp

5.  https://www.marketwatch.com

6. FE Fundinfo

7.  https://www.bankofengland.co.uk/banknotes/withdrawn-banknotes

8. https://www.onthisday.com

 

This statement is marketing material. It is for information purposes only and should not be reproduced, copied or made available to others. The information presented herein is for illustrative purposes only and does not provide sufficient information on which to make an informed investment decision. This document is not intended and should not be construed as an offer, solicitation or recommendation to buy or sell any specific investments or participate in any investment (or other) strategy. Potential investors will have sought professional advice concerning the suitability of any investment. Investors should be aware that past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and they may not receive back the amount they originally invested. The tax treatment of investments depends on each investor’s individual circumstances and is subject to changes in tax legislation.

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