Can Stocks Beat Inflation and Bond Worries To Wrap Up The Week?

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Summary

• Rising treasury bond yields may continue to play spoilsport for the stock markets.
• Improvement in the economy has opened doors for other investment options.
• Fed likely to maintain an easy monetary policy, may not intervene in temporary bond shock.

US stocks saw muted gains in the last four sessions, but can they beat the current uncertainties in the economy to end the week on a higher note? Most investors would look forward to wrapping up the week on a positive note after a harrowing week overshadowed by the bonds’ rapid advance.

While the markets will keep looking for clues from policymakers, the positive economic data in the recent weeks has helped lift the sentiments noticeably amid the pandemic gloom, mirrored in the benchmark indexes’ performances in February when Dow Jones and S&P 500 touched new highs.

This optimism was buoyed by the US Labor Department’s data which showed that jobless claims had dropped by 111,000 to 730,000 in the week ended February 20 this year, the highest improvement since November 2020.

The data also revealed that the American economy grew by 4.1 per cent in the fourth quarter, while demand for goods rose 3.4 per cent in January, maintaining an upward growth curve for nine-straight months.

In another report released in February by the US Commerce Department showed that retail sales rose 5.3% in January 20121 the first increase since September 2020, which indicated the economy was picking up.

Pic Credit: Pixabay 

Outlook Positive But Enthusiasm Still Low

Despite the positive outlook, concerns over the pace of the economic recovery remain.

Federal Reserve Chairman Jerome Powell’s comments on Thursday that the economy was far from reaching the levels of the pre-pandemic era appears to have dampened the optimism generated by the economic data, which had shown marked improvement in several quarters, including jobs, and manufacturing.

Mr. Powell also reiterated to keep the monetary policy loose, which was in line with the past remarks from other senior bank officials.

However, he did not give any indication of a likely bank’s intervention to stem the volatility in bond yields, and that helped little to assuage the concerns.

The 10-year treasury bond yields remained consistently high over the past two weeks, which investors say is bad for the stock markets. Besides, it has raised inflation concerns, and their combination may further disrupt the markets, they say.

Mr. Powell’s comments on Thursday at The Wall Street Journal Jobs Summit were consistent with his past statements on the US economy.

Responding to a media query on Tuesday on the upheavals in the bond market, Federal Reserve Governor Lael Brainard had ruled out any restrictive measures to rein in the yields. She exuded confidence that the recovery was on track and the current volatility reflected optimism about the future.

Pic Credit: Pixabay.

Will A Tighter Monetary Rule Help Stocks?

President Biden’s US$1.9-trillion economic relief package, which contains a generous capital outlay for businesses hit by the pandemic, apart from various other allocations, including household allowances through April and vaccine distribution, has raised hopes of a quicker rebound.

But markets were already flush with money from the US$900-billion COVID relief fund sanctioned by then President Donald Trump in December, fuelling further inflation concerns and that may have contributed to the spike in bond yields. Money managers are increasingly wary of the impact of the cash flows in the economy as the stock markets may benefit more from a tighter monetary regime.

Moreover, new opportunities from a rebound may drive people away from stocks to other greener pastures. Investors seemed vigilant of the changes but would also want their investments to give returns, and sooner the uncertainties are removed, the sooner the stocks will be able to bounce back.