Are Cracks Forming In The '4 Pillars' Supporting The Stock Market?

For more than a year now, the SPDR S&P 500 ETF Trust SPY has been ripping higher off of its pandemic lows.

Tom Essaye, founder of Sevens Report Research, said Friday the stock market rally has been supported by four major pillars over the past year. Unfortunately, two of those pillars may now be cracking, putting the market at risk in the near-term.

Essaye listed the following four bullish catalysts as pillars of the stock market rally over the past year.

1. Government stimulus. The U.S. government has already spent about $6 trillion in stimulus to prop up the economy throughout the pandemic downturn. The recent $1.9-trillion stimulus package will likely be the last one, and Essaye said this stock market pillar is now cracked.

“Bottom line, the outlook for government spending is turning much more mixed, because while there may be more spending (which is good for growth), it’s going to come with tax increases (which is bad for growth), and that mixed outlook is a departure from the past year (where it was all spending and no tax increases),” Essaye said.

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2. Federal Reserve Accommodation. The Fed dropped its target fed funds interest rate range to between 0% and 0.25% and has been purchasing $120 billion in assets per month to help maintain a healthy credit market. Essaye said this pillar is now also cracked given a growing number of Fed officials said they see a rate hike coming in 2022 as of the Fed’s most recent dot plot projections.

3. Vaccine Optimism. Essaye said vaccine optimism has been a bullish catalyst throughout the rally, from positive critical trial data to FDA approvals to a U.S. vaccine rollout that's now ahead of schedule. Unfortunately, Essaye said financial markets have already priced in an end to the pandemic within the next few months, so it's unclear how much stock market upside the vaccine rollout can provide moving forward.

4. No Double-Dip Recession. It seems like a lifetime ago that investors were concerned about a potential double-dip recession in 2020 or 2021. However, employment and earnings have been steadily trending in the right direction, and the chances of a double-dip recession appear extremely low at this point.

Benzinga’s Take: The economy is well-positioned to bounce back aggressively in 2021. It remains to be seen if there is more upside to stock prices once support from government stimulus and the Federal Reserve are scaled back.