MANHATTAN (CN) — Markets had a down week, flatlining as President Trump was impeached a second time and President-elect Biden’s proposed $1.9 trillion stimulus proposal brought little succor.
While investors rallied last week and each of the three indices set new records amid the deadly riot in the Capitol building on January 6, U.S. markets had simmered below those highs by Friday’s closing bell.
Even after Biden’s stimulus proposal was unveiled late Thursday, investors were not tempted into a buying mood. Most analysts had expected something worth at least $1.3 trillion, so the final proposal — which includes $1,400 payments to some citizens — was nearer the high end of expectations.
The Dow Jones Industrial Average gave up all its previous gains, finishing the week at 30,814 points, 283 shy of its previous high on January 8. The S&P 500 and Nasdaq also had underwhelming weeks coming off their highs, dropping to 3,768 points and 12,998 points, respectively.
Markets abroad also turned south later in the week, with European indices losing significantly on Friday. The pan-European Stoxx 600 dropped 1%, and markets in Germany and France did slightly worse. Markets in Asia were either flat or slightly down, though South Korea’s Kospi fell 2%.
While the stimulus has been cheered, and indeed expected, by many investors, some worry the spending could take longer to filter through the economy. “Last month Congress approved $82 billion in education grants and $69 billion in public health funding, and those funds look likely to be used first before any additional funds are spent,” according to a research note by Goldman Sachs researchers led by Jan Hatzius. “Moreover, spending in some of these categories is likely to be driven by the need for spending — on vaccinations or testing, for example — rather than simply the amount of funding available.”
Another lingering concern has been that more stimulus could “overheat” the U.S. economy, in which aggregate demand outpaces growth, but such concerns could be overstated.
“These criticisms should be ignored,” wrote Josh Bivens, director of research at the Economic Policy Institute, noting Biden’s proposal is “highly unlikely to lead to any durable uptick in inflation or interest rates,” which are the normal indicators of an overheated economy.
Bivens noted the Fed is primed to raise interest rates if inflation starts to rise, and that the U.S. economy is now harder to overheat since, ironically, more income is concentrated in wealthier households that are more likely to save rather than spend it.
James Knightley, chief international economist at ING, agreed, writing that “much of the additional payments to individuals is likely to be saved initially, but when the re-opening comes it could be used to fuel a consumer boom.” He added this “reinforces our view that the U.S. economy will grow by more than 5% this year.”
Regardless of the long-term impact of the stimulus, investors have plenty to be worried about in the short term. New unemployment claims are once again spiking. For the week ending January 9, more than 965,000 new claims were filed, well above the 787,000 filed the previous week. Including special federal employment programs during the pandemic, more than 1.1 million new claims were filed last week.
This marks the 43rd straight week of initial unemployment claims coming in worse than the worst week of the Great Recession, and this recent step back has some concerned. Knightley called Thursday’s report “an awful outcome” and said people may need to brace for “another decline in jobs in January.”
Some experts are not too worried, however. “The spike in initial jobless claims comes after two below-trend readings, so it looks more like a correction than a renewed increase in the trend,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “I expect claims to fall sharply over the next couple weeks, and then to drift until the economy can reopen properly in the spring.”