[Good Morning Stock Market] Expectations for Economic Normalization and Supply-Demand Improvement Drive US Dow and S&P 500 to Record Highs

$1.9 Trillion Stimulus Positive Impact... Expectations Rise for New Fund Inflows
Positive Effects on Domestic Stock Market... Limited Scope Due to Variables Like EU-UK Conflict"

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] The U.S. stock market showed an upward trend as the U.S. government launched a $1.9 trillion (approximately 2,154 trillion KRW) economic stimulus package, raising expectations for economic normalization and liquidity supply. It is also expected to have a positive impact on improving domestic investor sentiment. However, some analysts caution against excessive optimism due to ongoing concerns such as inflation rates and fiscal deficits.

On the 15th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 32,953.46, up 0.53% from the previous trading day. The S&P 500 also rose 0.65% to close at 3,968.94. Both indices set new all-time highs. The tech-heavy Nasdaq index closed at 13,459.71, up 1.05% from the previous day.

◆ Sangyoung Seo, Kiwoom Securities Researcher = The U.S. stock market rose amid anticipation of the Federal Open Market Committee (FOMC), supported by economic normalization and liquidity supply. While financials and energy sectors, which had seen significant gains recently, underperformed, there was differentiation with strong performance in theme stocks, technology, utilities, and airlines. At one point during the day, friction between the European Union (EU) and the United Kingdom caused declines in government bond yields and stock markets, but the impact was limited. Another notable feature was the expanded gains in Nasdaq due to liquidity supply and falling interest rates.

The U.S. Transportation Security Administration (TSA) announced on the 14th that the number of airport passengers in the U.S. reached 1,344,000, continuing an upward trend. Earlier this month, the figure was around 700,000 to 1,000,000, about 50% of the 2019 level, but the increase has continued due to COVID-19 vaccinations, highlighting the economic normalization issue. Additionally, the start of $1,400 payments per person has raised expectations for new inflows of funds from individual investors. The market expects new funds to flow in up to $125 billion. This appears to have driven the strength in theme stocks and technology stocks favored by individual investors, such as electric vehicles.

Meanwhile, the EU initiated legal action after the UK unilaterally extended the Northern Ireland customs grace period, causing European and U.S. stock markets to turn downward during the day. The euro and pound weakened against the dollar, and U.S. Treasury yields also fell, weakening risk asset appetite. If the conflict intensifies, financial market volatility could increase.

The strong performance of the U.S. stock market amid expectations for economic normalization and new liquidity supply is positive for improving domestic stock market investor sentiment. However, considering the decline in European markets due to escalating EU-UK friction and the temporary weakness in the U.S. market during the day, the magnitude of change is expected to be limited. The slight decline in U.S. Treasury yields ahead of the FOMC is also positive. Although the rate drop is due to expanded friction between the EU and the UK, it partly reflects market participants’ high expectations for the FOMC. The Federal Reserve (FED) is unlikely to signal new policies at this FOMC, so the market may see outcomes different from expectations. Nevertheless, given the favorable impact on the U.S. stock market today, this is a positive factor for the domestic market.

◆ Wonil Jung, Yuanta Securities Economist = The $1.9 trillion U.S. stimulus package has been evaluated from various perspectives in the market. Especially combined with the rapid rebound in U.S. economic indicators observed since last year, recent U.S. growth forecasts have surged. While the stimulus is necessary to respond to the current COVID-19 situation, it can also be seen as excessive support in terms of scale.

Looking at the budget outlook through 2031 presented by the U.S. Congressional Budget Office (CBO), the fiscal deficit was estimated at $3.1 trillion last year. This year, the deficit is projected to slightly decrease to $2.3 trillion. However, this figure does not consider the $1.9 trillion stimulus package. Simply reflecting this would increase this year’s fiscal deficit to $4.2 trillion, a further rise compared to last year. Calculating the fiscal deficit ratio to gross domestic product (GDP), it already exceeded 100% last year at 102%. Including the stimulus, this ratio is expected to reach 110.9% this year.

Due to the structural characteristics of U.S. fiscal revenue, concerns about fiscal sustainability are inevitable. Consumption tax accounts for about 18% of U.S. fiscal revenue, but personal income tax accounts for 41.5%, the second highest among OECD countries. This implies a significant need to collect personal income tax to expand government finances.

While the stimulus package may have immediate effects, its long-term impact on major fiscal revenue sources like consumption tax is limited, potentially leading to a larger-than-expected fiscal deficit ratio to GDP. Additionally, individuals anticipating future personal income tax imposition may increase savings to prepare for an uncertain future. Indeed, the savings rate surged sharply as of January.

U.S. inflation remains a burden. The consumer price inflation rate recorded +0.2% year-on-year in May last year and recovered to the 1% range from July last year. As of last month, headline inflation was +1.7% year-on-year. This upward trend is interpreted as driven by a recovery in goods prices.

Goods prices recorded -2.5% year-on-year in April and May last year, so base effects may still appear. On the other hand, service prices have declined further since the second half of last year and remain low. Since services account for 62.5% of U.S. consumer prices, the headline index is more likely to be influenced by service prices than goods prices. This suggests that either the base effect will be delayed or a high level of headline inflation will persist for some time.

Although the market predominantly views the base effect as temporary, there is also a possibility that inflation levels unseen in the past decade may continue for a relatively long period, so careful interpretation of indicators is necessary.

This content was produced with the assistance of AI translation services.