Don't Markets Abhor Uncertainty?
SMITH BRAIN TRUST – Stocks surged on Wall Street last week, even as a violent siege at the U.S. Capitol left many Americans feeling unsettled. The Dow Jones ended the week above 31,000, near its all-time high. The S&P 500 and NASDAQ, meanwhile, also showed gains on the day and for the week.
Why didn't the unprecedented violence and chaos at the U.S. Capitol rattle investors, who traditionally abhor uncertainty and who traditionally value stability? There’s more to the story, explains Maryland Smith Clinical Professor of Finance David Kass. Kass has served as an economist in senior positions with several federal agencies, including the Federal Trade Commission and Bureau of Economic Analysis.
In an interview with CBS News, Kass explained that stock gains made the day of the riot appeared to be in reaction to the results of the Georgia Senate election. The runoff election would put two Democrats in the U.S. Senate, tipping the balance of power toward Democrats, who would have 50 seats and the tie-breaking seat to be held by Vice President-elect Kamala Harris. With Democrats in the majority, Kass says, it “would indicate there’s more likely to be a larger stimulus bill coming soon for the economy, which the economy needs, and the stock market wants – and the vast majority of Americans want it and would benefit from it.”
Kass adds, “The stock market is forward-looking and always anticipates or discounts the future, looking at six, nine, 12 months into the future. So, the stock market is not reflecting the current situation, which at the end of March was very grim, very dismal, absolutely. But it was looking ahead.”
Multiple factors have contributed to the market’s rise, despite a struggling economy with high unemployment. “You have a combination of accommodative monetary policy, stimulative fiscal policy, and the [COVID] vaccine,” says Kass.
Kass cited another contributing factor. “Because people were at home, they were unable to spend the money on travel, tourism, entertainment, going to concerts, etc. The money effectively went into savings. You can’t spend it the way you normally would. And a lot of the savings went into investments.”
Despite the unrest surrounding last Wednesday’s riot at the Capitol, optimism remains on the upswing, Kass said. “I think the outlook [for the stock market] is very positive. I’m very optimistic.”
Read more via CBS New York’s “Surging Stock Market Reflects ‘Very Bright Outlook’ For Economy, Finance Prof Says.”
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