Shares ended a mixed week after initially rising on Friday following Treasury Secretary Janet Yellen’s call for a major stimulus package to accelerate the economic recovery.
Four experts discuss what her comments mean for markets and how to invest if the pandemic continues.
Jim Stewart, columnist with The New York Times, says the benefits of overspending far outweigh the risk.
The question is, is there a greater risk of overspending than under-spending? It’s pretty clear. I mean, what’s the risk of too much of an incentive? Maybe higher interest rates down the road, maybe a little inflation, but as Yellen pointed out , we have the tools to deal with this. The risk of under-spending is further and greater unemployment, a downward spiral in the economy, possibly a recession. That’s much harder to get out, so I think her point on it risk is pretty indisputable … Of course this is very good for the stock market. I mean just look at the current levels, which I think are largely anticipating this major stimulus. That’s very optimistic, and ironically, the people who own shares and benefit from this are usually the ones who have not been hurt so much by the pandemic. Specific elements that are meant to help people hurt by the pandemic, k that it is a very blunt instrument. It’s not very closely aligned with helping those specific people, and I think that’s something that bothered some of its critics, but if you’re nevertheless trying to make the economy thrive, you know it’s not going to be perfect. “
Liz Young, Director of Market Strategy at BNY Mellon Investment Management, is pleased with the rate increase.
“The real question here is whether rates should go up and why are they going up? And I think yes they should go up, and they’re going up because the economy is growing, we expect further expansion later in the year, we expect a big improvement from the corporate data, and we’re expecting a little bit of inflation. Inflation keeps getting kind of a bad rap. Inflation means there’s healthy demand in the economy, so I welcome the rise in rates. And the question of what’s the breaking point, when does it matter to the market i don’t know what the magic number is i don’t know if there is a magic number across the mental threshold when it actually starts turning down i think it’s more about the speed we get there And if we gradually move up in rates throughout the year, I think that’s okay and we can digest it, so I’m okay with this rate hike. I think there will be volatility in the Treasury curve in 2021. I would lean into that volatility and use it as a buying opportunity if it causes a decline in stocks. “
Katerina Simonetti, senior vice president at Morgan Stanley Private Wealth Management, looks ahead to the impact of changing consumer behavior in the markets.
“The market has been strongly supported. It’s strong. The earnings season brought some big surprises. And I think we’ll definitely get on board with the reopening philosophy and find out about the cyclical names and the story of reopening and repositioning our wallets to depict what’s going to happen in that post-vaccine, post-Covid era, which is really exciting. But having said that, I think consumers have developed some very powerful habits and stay-at-home names over the past nine months. “Definitely shouldn’t be discounted. There’s a place for them in the portfolio. And you know, we’re definitely watching and owning them.”
George Cipolloni, portfolio manager at Penn Mutual Asset Management, looks at how Federal Reserve policies have shaped investor behavior.
“When you think about the impact of the Fed, they have two major consequences here: they have kept interest rates low, which has driven up asset prices. And number two, they have driven a certain behavior in the marketplace where people tend to a little more irresponsible. And we’ve seen that from some examples of specific stocks, like GameStop … That’s behavior that’s guided by Fed action, so that’s something to watch out for. And then just go back. I think this reflation trade is important. We are income investors, so you’re seeing a dramatic impact on the bond market today, and I think that’s another very, very important thing to keep an eye on. ”
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