The Dow Jones Industrial Average closed above 30,000 yesterday for the first time. Since the Dow first crossed the 20,000 mark on January 25th, 2017, that means the market has climbed 50 percent since Donald Trump has been president.
What is most remarkable is that Wall Street suffered a vicious bear market early this year as the pandemic hit, sliding a sickening 37 percent in only a few weeks. This ended what had been the longest bull market in history, over ten years. But it turned out to be the shortest bear market in history, lasting only a few weeks before the average began to climb back. By midsummer it was, once again, flirting with new highs.
The American economy has still not recovered from the lockdowns of spring—when unemployment reached 14.7 percent, having been as low as 3.5 percent in February. It is now at 6.9 percent and new lockdowns are threatening the recovery. What explains this remarkable new bull market?
The stock market, of course, looks to the future, not the past. But it could hardly have helped noticing that the economic slowdown this year was not as bad as forecast by economists, who thought unemployment might reach well above 20 percent. Instead, the unemployment peaked in April and has declined every month since. This made the future look brighter.
A major reason why unemployment stayed as low as it did was because the internet made it possible for millions of white-collar workers to work effectively from home. Had a similar shutdown happened as recently as the 1990s, unemployment would have risen perhaps as high as 50 percent, with catastrophic economic consequences.
The market clearly sees continued economic improvement in the medium and long term. Vaccines will begin to be available as early as next month, a remarkable achievement for which the Trump administration has not received the credit it deserves. It is by far the fastest development of effective vaccines in medical history, thanks to procedures the administration put in place.
Once a large proportion of the population is vaccinated, herd immunity will be achieved, the virus will wither for lack of targets, and the country can get completely back to normal.
But there is another reason the market has been so bullish in recent months. It is analogous, on a much smaller scale, to what happened in World War II.
Most economists—their clouded crystal balls ever at the ready—thought that, as soon as the war ended, the economy would plunge back into recession as government spending sharply declined. One of the main reasons for the GI Bill, passed in 1944, was to slow the return of veterans to the workforce by creating incentives for them to go to school instead, keeping unemployment down.
But during the war, while unemployment was nearly zero, many commodities were either rationed or unobtainable. (Because rubber was in critically short supply, new automobile tires were nearly impossible to get, making the war years the golden age of the flat tire.) So, at the end of the war, demand for these commodities was very high, and there was lots of money in the bank to pay for them. The result was not depression but boom.
Now, because of the shutdowns, people have been spending less money on restaurants, gyms, theaters, travel, haircuts, dry cleaning, clothes, and many other commodities. McCormick and Co. has seen its spice sales increase this year by 8 percent as home cooking has replaced restaurant meals. With unemployment, especially among white-collar workers, much lower than first feared, that unspent money is in the bank waiting for normalcy to return.