When America’s amusement parks and baseball stadiums are no longer to serve as COVID-19 mass vaccination sites, some investors believe that households that pull in pandemic financial support from the government can spend.
While consumer splurge could initially boost the parts of the economy devastated by the pandemic, a greater concern for investors is that a sustained spending period could also cause prices for goods and services to go drastically. increase, decrease the value of financial assets and ultimately increase costs. of life for everyone.
“I don’t think inflation is dead,” said Matt Stucky, asset manager at Northwestern Mutual Wealth Management Company. “The desire of major policymakers is to have it, and it is the strongest it has ever been. You will see rising inflation. “
Wall Street investors and analysts have become fixated in recent weeks on the potential of the Biden administration’s planned $ 1.9 trillion fiscal stimulus package, which aims to relieve hard-hit households from spiraling inflation out of control.
Economists at Oxford Economics said Friday they expect “the longest inflation rate to be above 2% since before the financial crisis, but it is unlikely to sustain the 3% break.”
Severe inflation can hurt companies by driving up costs, shrinking profits and causing stock prices to fall. The value of savings and bonds can also be broken down over time by high inflation.
Another concern among investors is that runaway inflation, which took hold in the late 1970s and pushed 30-year mortgage rates to nearly 18%, could force the Federal Reserve to lower its $ 120 billion-a-month bond purchase program or lower its benchmark rate. to increase. above the current target of 0% to 0.25% earlier than expected and the markets were shocked.
At the same time, it is not far-fetched to say that some financial assets have already been inflated by the Fed’s pedal-on-the-metal policy of low interest rates and easy credit flow, and perhaps need to cool down a bit.
US stocks, including the Dow Jones Industrial Average DJIA,
S&P 500 index SPX,
and Nasdaq Composite COMP,
closed at record highs on Friday, while debt-laden companies can now borrow in corporate “junk” bonds, or speculative bonds, at record low rates of about 4%.
Read: Stock market stimulated by incentives – what investors count on
In addition to picking up stocks and bonds, house prices in the US have also soared through the roof during the pandemic, despite the US still having to recoup nearly as many jobs from the COVID-19 crisis as during the worst global financial crisis in 2008 .
This graph shows that job losses from the pandemic remain close to the level of the aftermath of that latest crisis.
Job losses must be tamed
LPL Research, Bureau of Labor Statistics
Fed Chairman Jerome Powell said on Wednesday that he does not expect a “major or sustained” inflation outbreak, while also stressing that the central bank remains focused on reclaiming lost jobs during the pandemic as the US appears to be making serious progress in vaccination. program at the end of July.
Finance Minister Janet Yellen reiterated a call on Friday that now is the time for more, major fiscal stimulus measures.
“Overall, the guide is, Will it cost me more to live in a year than a year ago,” Jeff Klingelhofer, co-head of investments at Thornburg Investment Management, said of inflation in an interview with MarketWatch.
“I think we need to watch wage inflation,” he said, adding that higher wages for those with higher incomes have been largely flat for most of the past decade. Also, many of the low-wage households most affected by the pandemic have been left out of the increases in financial asset and house prices over the past decade, he said.
“For the people who haven’t taken that ride, it feels like perpetuating inequality that’s been going on for a while,” he said, adding that the “only way to get broad inflation is through broad overheating. of the economy. We have the exact opposite. The bottom third is nowhere near overheating. “
Klingelhofer said it is also likely a mistake to look at benchmark returns on 10-year Treasury bonds for signs of the economy overheating and inflation, as “it is not a measure of inflation. It’s just an indication of how the Fed might respond, ”he said.
The 10-year treasury yield TMUBMUSD10Y,
is up 28.6 basis points in the year to date to 1.199% on Friday.
But given last year’s sharp price increases, is the US housing market at least at risk of overheating?
“Not at current interest rates,” said John Beacham, the founder and CEO of Toorak Capital, which finances apartment buildings and single-family homes, including homes undergoing renovation and construction.
“More people will return to work as the year progresses,” Beacham said, but added that it is important for Washington policymakers to build a bridge for households through the pandemic, until they spend on socializing, sporting events and concerts. and more may resemble a time before the pandemic.
“It is clear that consumption is likely to increase in the short term,” he said. “But after that it normalizes.”
The US stock and bond markets will be largely closed on Monday for Presidents Day.
Tuesday is the only piece of economic data coming from the New York Federal Reserve’s Empire State Manufacturing index, followed Wednesday by a slew of updates on U.S. retail, industrial production, homebuilder data and minutes from the most recent policy meeting from the Fed. Thursdays and Fridays provide more data on jobs, housing and business, including existing home sales for January.