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After Republicans and Democrats reached a stalemate in Congress, President Trump issued an executive order from his golf club in New Jersey and signed other memorandums. The executive order called for a payroll-tax deferral. The payroll tax pays for Social Security and Medicare.
This column is not intended to be a comprehensive analysis but is limited to the impact of the deferral on the stock market.
Trump’s order, if implemented (amid questions over both its legality and its efficacy, with one Republican senator labeling it “unconstitutional slop”), would spike the stock market. Let’s explore this issue with the help of a chart.
Chart
Please click here for an annotated chart of the Dow Jones Industrial Average ETF Trust DIA, +1.01%, which tracks the Dow Jones Industrial Average DJIA, +1.03%.
Note the following:
• The stock-market chart is monthly, giving investors a long-term perspective.
• The chart shows that after touching the upper band of the “mother of support zones,” due to coronavirus-related decline, the stock market has gone straight up. The monthly chart does not have a single red candle during the rise. This is not a normal stock market behavior.
• The chart shows that many stocks and ETFs entered Arora buy zones during the dip, providing significant opportunities to buy at low prices. For the most part, these stocks and ETFs have not gone through their normal backing-and-filling process that would be expected. This is not normal.
• When the federal government borrowed money to send $1,200 stimulus checks to most Americans, a large number of new trading accounts were opened. Did you already guess the dollar amount with which these accounts were opened? It was $1,200.
• People opening these new brokerage accounts clearly did not need the federal government to borrow and send them $1,200.
• Those who have lost their jobs need the most help. Unfortunately, a payroll tax cut will not help them.
• A payroll tax cut will simply put more money in the pockets of those who have jobs. Some of the extra money will flow into the stock market.
• The chart shows that RSI (relative strength index) is positive and the stock market is decisively above the top support zone. With the stock market so strong, it does not need further spiking by another government program.
• Many seniors depend on Social Security for most of their income. By some estimates, Social Security will become insolvent in about 15 years.
• Most seniors depend on Medicare for their health-care needs. Medicare is also underfunded.
• In my view, it is the government’s job to help those who have been hurt badly by coronavirus but it is foolish to borrow and send money to those who do not need it. Before sending me hate mail, please see: “The cost of Biden’s economic plan to the stock market is more than you might think.”
• One has to be delusional to believe that this strong stock-market rally would have occurred without money printing and government borrowing.
• The chart shows that the Fed’s balance sheet stood at $0.87 trillion before the 2008 recession. The Fed’s balance sheet is simply a fancy way of describing money printing.
• The chart shows the progression of the Fed’s balance sheet on the way to $10 trillion.
• Not shown on the chart is that the U.S. debt is now about $26 trillion. When properly accounting for all the liabilities of the government, the total liabilities stand at about $132 trillion. By some estimates, each taxpayer’s share of the liability is about $860,000.
Small amounts but big impact
Here are the reasons why additional amounts in small accounts from Trump’s payroll-tax deferral would have a disproportionately large effect.
• The total amount over tens of millions of accounts adds up.
• It lifts stock-market sentiment.
• So far the data show that newer investors with small accounts tend to be superaggressive. Many place market orders, not limit orders. This has a disproportionate effect in running up the stock market.
• This stock market is controlled by the momo (momentum) crowd. The momo crowd keeps on buying not because the economy is good but because the stock market is going up. The momo fire is raging. Think of providing additional money to millions who will put it in the stock market as pouring gasoline over the fire.
What does it all mean?
There is a high probability of the stock-market bubble getting bigger. Please see the chart referenced in “The stock market is in a bubble — but the bubble is likely to get bigger.” Investors should consider positioning themselves to make money from the stock-market bubble getting bigger while protecting themselves. Opportunities to make money while controlling risks abound.
Disclosure: Arora Report portfolios have positions in Apple, Amazon, Alphabet, Microsoft and Facebook. Nigam Arora is the founder of The Arora Report, which publishes four newsletters. He can be reached at Nigam@TheAroraReport.com.
