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Chief economist update: No pandemic on Wall Street

Pandemic? What pandemic?

The S&P500 index the Dow Jones Industrial Average closed 2020 at record highs despite the US topping the list of countries with most total cases of coronavirus infections (21.3 million or roughly 25% of the world's total), new cases (154,000) and total deaths (362,000).

The S&P500 closed 16.3% in the black for the calendar year 2020, outperforming the Stoxx-50 index (-5.1%), the FTSE-100 index (-14.3%), and the Nikkei-225 index (+16.0%) - more than double its average annual return from 1956 to 2019 of around 8%

Even more spectacular is the 43.6% surge in the Nasdaq composite index in 2020 and onwards to a fresh record in the first trading day of 2021, boosted by increased demand for "working from home" technologies prompted by social and business restrictions wrought by the coronavirus.

Wall Street's 2020 rally is perfectly rationale given vaccine optimism and the end of President Donald Trump's term in office.

But underlying all these are America's aggressive fiscal and monetary responses.

The CARES Act, direct payments to households, extended unemployment benefits, the Paycheck Protection Progamme, etc. implemented by the government, along with the Fed's interest rate reduction and QE, mitigated the negative impact on the economy.

Low and lowered interest rates induced TINA (there is no alternative) trade as investors sought better returns in the stock market that, in turn, lifted upward momentum and forced even "unbelievers" into the equity market for "fear of missing out" (FOMO).

Fast forward to 2021. While it's encouraging that the rate of vaccinations have picked up as of late, Forbes magazine writes that "...at the current daily level of uptake it's going to take years to vaccinate the American people".

This implies that the number of states reimposing restrictions to limit infections would continue to expand. More so, after Joe Biden becomes the 46th POTUS on January 20.

Biden's already announced that he will ask Americans to commit 100 days of wearing masks as one of his first acts as president. Announcing more restrictions wouldn't be far behind if the US continues to record high rates of infections and deaths.

This would put added downward pressure on consumer confidence and by extension, consumer spending.

Already, the Conference Board's consumer confidence index has dropped to a seven-month low reading of 88.6 in December 2020 - with the present situation index falling to its lowest reading in four months and the end of the year reading for the expectations index, at 87.5, remains below the pre-pandemic score of 106.1 recorded in February 2020.

Read our full COVID-19 news coverage and analysis here.

Read more: Dow Jones Industrial AverageWall StreetCARES ActConference BoardDonald TrumpJoe BidenNasdaqPaycheck Protection Progamme
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