Why market investors are now troubled by signs of rising growth

InvestorLast year there was no gliding problem between the economic devastation and economic devastation caused by the epidemic, which reached a record high in the market. An increasingly healthy economy that is terrorizing them.

In recent times, the S&P 500 stock index has declined, its worst weekly performance in a month in the past week, before picking up on Monday, only to dip again on Tuesday and fall 1.3 percent on Wednesday. The bond market is also showing concern, as yields have fallen by about 3 percent this year due to increased returns in the market for treasury bonds.

Market perceptions are a direct result of many developments that point to bright prospects for economic recovery. Vaccination is on the rise, retailing and industrial production have become surprisingly solid, and perhaps most important, the Biden administration is expected to push this $ 1.9 trillion stimulus plan through Congress In the coming days.

“We’ve never seen this scale of fiscal response before, and how the market is struggling with the process,” said Julia Coronado, founder and president of Macropolicy Perspectives, a market and economics consulting firm. Because the United States has never before put so much money into the economy, Ms. Coronado said, the market is “questioning what some of the unintended consequences may be.”

A clear result is expected strong growth. Wall Street economists now expect output to increase by about 5 percent in 2021. Such strong growth – this would be the best year for the economy since 1984 – would be a good thing for stocks. Ultimately, a strong economy makes it easier for companies to boost sales and profits, as employment increases and consumers have more money to spend.

But growth brings with it the prospect of rising inflation, which in turn may prompt the Federal Reserve to raise interest rates – and this is investors’ reaction with varying results for the stock and bond markets.

When the epidemic began in March, a widespread panic ensued, which led to the S&P 500, which lost more than a third of its value within weeks, to calm the Fed’s markets and fall completely from below Moved to stop from. This reduced interest rates to near zero, and indicated that it would catch them there. It also essentially started pumping billions into the markets every month, using them to create new dollars and buy government bonds. Those so-called easy money policies provided the S&P 500 a tailwind, which rose more than 70 percent between March 23 – when the stock was down – and Wednesday.

“Part of the excitement in the market has been that the Fed is going to keep cocaine,” said Lisa Chalet, chief investment officer at Morgan Stanley Wealth Management. “There are better and better things, less and less justification for keeping the Fed at zero.”

The Fed’s move also affects bond markets, typically through rising and falling yields. In general, the yield on government bonds – which is partly determined by interest rates set by the Fed – broadly reflects investor views on how the economy will perform over time. When growth is weak, the yield of government bonds is low. (Last year, they touched the lowest level on record when the economy collapsed.) When growth accelerates, the yields of those bonds are high.

This time, Investors are worried that the economic rebound will cause inflation. Some economists currently see a significant risk of runaway inflation, but investors say the only possibility of painful price increases of the 1970s could drive the Fed to raise interest rates to affect the economy .

This would be bad for the bond owners. If the Fed raised rates, rates around the bond market would rise. Then, the bond price that investors currently hold will have to fall until they produce yields that were comparable to the new, higher rates in the market.

In anticipation of this, investors are now demanding higher returns in the form of higher yields on their bonds. Last week, yields on the most widely viewed 10-year Treasury note of the government bond market jumped several times to 1.60 percent.

The market for interest rate futures – where investors speculate on going interest rates in the coming years – provides a timeline for what investors think may happen. Prices there now show an increasing probability that the Fed raised rates in the first quarter of 2023, before the central bank directed it.

And ever since the Fed has suggested that it plans to slow down other elements of its easy money policy before raising rates, investors expect the central bank to cut back on help for the market as soon as next year Will start

Higher rates can be a problem for stock market performance. One reason is that higher interest rates make bonds more attractive to stock markets with at least a few dollars. Higher rates may also make lending more expensive for companies, especially smaller ones that have potential but lack a track record of profitability.

Such high-growth companies – Shopify, CrowdStrike and Zoom Video between them – Performed incredibly well during the recession Because their business model benefited directly from the move to work from home. But last week, they were battered, and their shares fell more than 10 percent and bond yields rose.

So what should investors do? Analysts have urged them to buy shares of companies benefiting from near-term gains in the economy. Known as “cyclical”, these types of stocks include banks and energy companies, whose profits grow during periods of rapid growth, high interest rates, and rising prices.

And they are exactly the parts of the stock market that have done the best so far this year. For example, the S&P 500 energy stock is up more than 30 percent in 2021, and the financials are up more than 14 percent. This suggests that investors are building their portfolios to benefit from an increasingly robust economy rather than riding a wave of easy money flowing out of the Fed, which many believe – and – and end Should be

Ms. Chalet of Morgan Stanley said, “You can’t eat your cake and eat it too.” “And if you are cured then at some points you do not need to be in the ICU.”

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *