When America’s amusement parks and baseball stadiums no longer have to serve as COVID-19 mass vaccination sites, some investors believe that households throwing pandemic financial aid from the government may stop.
While a decline in consumers could initially stimulate parts of the economy devastated by the pandemic, a greater concern for investors is that a sustained spending period could also lead to dramatic increases in prices for goods and services, affecting the value of financial assets. and, finally, the rising cost of living for everyone.
“I don’t think inflation is dead,” said Matt Stucky, equity portfolio manager at Northwestern Mutual Wealth Management Company. “The desire of key decision makers is to have it and it is the strongest it has ever been. You will see an increase in inflation. ”
Wall Street investors and analysts have focused in recent weeks on the potential of the $ 1.9 trillion planned fiscal stimulus package of the Biden Administration, which aims to relieve affected households, so that inflation gets out of control.
Economists at Oxford Economics said on Friday they expected to see “the longest inflation span more than 2% since before the financial crisis, but is unlikely to permanently break 3%”.
Severe inflation can affect businesses by increasing costs, reducing profits and causing stock prices to fall. The value of savings and bonds can also be eliminated by high inflation over time.
Another investor concern is that runaway inflation, which rose in the late 1970s and pushed 30-year mortgage rates to nearly 18 percent, could force the Federal Reserve to cut its monthly bond purchase program by $ 120 million. billion or increase the reference interest rate above the current target from 0% to 0.25% sooner than expected and scared the markets.
At the same time, it goes without saying that some financial assets have already been inflated by the Fed’s policy of pedaling to low-rate metal and a slight flow of credit, and could be due to cooling.
US equities, including DJIA Dow Jones Industrial Average,
S&P 500 index SPX,
and Nasdaq Composite COMP,
closed at an all-time high on Friday, while debt-laden companies can now borrow on the corporate or speculative junk bond market at record rates of about 4%.
Read: The stock market stimulated by stimulus hopes – what investors are based on
In addition to rising stocks and bonds, U.S. home prices also skyrocketed during the pandemic, despite the fact that the U.S. still needs to recover nearly as many jobs from the COVID-19 crisis as in the worst. the global financial crisis of 2008.
This graph shows that the jobs lost as a result of the pandemic remain close to the levels observed after the last crisis.
Job losses must be tamed
LPL Research, Bureau of Labor Statistics
Fed Chairman Jerome Powell said Wednesday that he does not expect a “high or sustained” outbreak of inflation, while stressing that the central bank remains focused on recovering jobs lost during the pandemic as the US seeks to make serious progress. in his vaccination. program until the end of July.
Treasury Secretary Janet Yellen reiterated a call on Friday that it was time for more big tax incentives.
“Broadly speaking, the guide is, it costs me more to live a year ago than a year ago,” Jeff Klingelhofer, co-chief investment officer at Thornburg Investment Management, said about inflation in an interview with MarketWatch.
“I think what we need to look at is wage inflation,” he said, adding that higher wages for those on higher incomes have been largely fixed for most of the past decade. Also, many lower-wage households most affected by the pandemic have been left out of the rise in financial asset prices and housing values over the past decade, he said.
“For those who have not taken this trip, it feels like a perpetuation of the inequality that has been at play for some time,” he said, adding that “the only way to achieve high inflation is with a wide overheating of the economy.” We have the exact opposite. The lower third is not almost overheated. “
Klingelhofer said it is also a mistake to follow the 10-year Treasury benchmark yields for signs that the economy is overheating for inflation as well, because “it is not a proxy for inflation. It’s just a proxy for how the Fed might react, “he said.
10-year treasury yield TMUBMUSD10Y,
has risen 28.6 basis points this year to 1.199% since Friday.
But with last year’s sharp rise in prices, is the US real estate market at least at risk of overheating?
“Not at current interest rates,” said John Beacham, founder and CEO of Toorak Capital, which finances single-family apartment buildings and rental properties, including those undergoing rehabilitation and construction projects.
“Over the course of the year, more people will return to work,” Beacham said, but added that it is important for Washington policymakers to provide a bridge for pandemic households, to spending on socializing, sporting events, concert. and more may resemble the time before the pandemic.
“Clearly, there is likely to be an increase in consumption in the short term,” he said. “But then it normalizes.”
US stock and bond markets will be largely closed on Monday for President’s Day.
On Tuesday, the only economic information came from the New York Federal Reserve’s Empire State production index, followed on Wednesday by a series of updates on U.S. retail sales, industrial production, homebuilder data and minutes from the most recent political meeting of the United States. Fed. Thursday and Friday bring more data on jobs, housing and business, including sales of existing homes for January.