Markets Continue Momentum From Last Week

Markets' momentum from last week carried into Monday with the tech-heavy NASDAQ rising 1.05% and the S&P 500 gaining 0.65% to start the week. Investors await the results of the Federal Open Market Committee’s March meeting on Wednesday afternoon. The new $1,00 stimulus checks are beginning to be delivered to Americans while President Biden is now reportedly considering a major federal tax increase. Airlines, cruise lines, and other travel stocks have been on rise as investors react to decreasing new coronavirus cases and deaths in addition to an accelerating vaccine distribution.

Government Spending vs Taxes

President Biden officially signed the $1.9 trillion Covid relief package last week that includes another round of stimulus checks. The checks will go to those earning less than $75,000 and couples making below $150,000. The American Rescue Plan also extends the increased unemployment benefits of an additional $300 a week until September 6. The extra benefits were originally set to expire yesterday.

Just days after signing the new stimulus bill, reports surfaced that President Biden is considering the first major federal tax increase since 1993. The tax hike would help pay for a long-term economic program and the President is expected to propose tax hikes that mostly mirror his previous campaign proposals, which include an increase in the corporate tax rate and the income tax rate paid on income above $400,000, as well as raising the capital gains tax rate. Once the exact details are released, traders will have a better idea of how the changes may affect corporate profits.

Returning to 'Normal'

Along with additional stimulus, investors are encouraged by the recent progress in vaccine distribution and lowered COVID-19 cases. Already 11.1% of the U.S. population has been fully vaccinated for the coronavirus while 21.4% have at least received the first dose. Even more positively, 2.39 million doses were delivered last week which represented an increase week over week of 11%. Over 100 million doses have already been administered in the U.S. and those numbers are growing significantly.

With Johnson and Johnson’s (JNJ) vaccine now being cleared for use as well, those numbers should continue to grow and possibly at an even greater rate. One of the significant advantages of Johnson and Johnson’s vaccine is that it only requires one dose compared to the two required by Moderna (MRNA) and Pfizer (PFE). One dose should help speed the process in addition to just having another distributor. Many states are expanding their eligibility for the vaccine as well.

New coronavirus cases have been steadily decreasing since highs set in early January and the lowest they’ve been since mid October. Deaths have also been decreasing and are now the lowest since mid November.

FOMC Meeting

The Federal Open Market Committee is scheduled to meet on Tuesday and Wednesday, likely no immediate changes to monetary policy. What investors will be focusing more on is what the Fed has to say about the pace of the recovery and any possible decisions made in the short term. Some concerns have arisen of an overheating economy with massive stimulus packages, vaccine rollouts, and aggressive monetary policies that could lead to inflation.

However, the Fed has already said that it will maintain the current policy as is even if inflation rises above the targeted rate as the economy is still struggling. Fed chair Jerome Powell recently criticized the unemployment rate as he believes the real rate is closer to 10% than the advertised 6.2% when considering the drop in labor force participation. The Fed has repeatedly said it expects a long road ahead towards a full recovery.

Additionally, the economy has yet to experience any significant rise in inflation. Treasury Secretary and former Fed chair Janet Yellen recently reassured investors that inflation concerns are being overblown given the current state of the economy. Morgan Stanley economist Ellen Zentner expects the Fed to acknowledge the improved economic picture and inflationary pressures but will reinforce a long road to maximum employment that would sustain inflation growth.