When U.S. amusement parks and baseball stadiums no longer have to serve as COVID-19 mass vaccination sites, some investors believe that homes that will pocket government financial aid for a pandemic could start saving. -se.
While a consumer defeat could initially increase parts of the economy devastated by the pandemic, a greater concern for investors is that a sustained spending range could also cause prices of goods and services to rise sharply, affecting prices. values of financial assets and, ultimately, increased costs. to live for everyone.
“I don’t think inflation is dead,” said Matt Stucky, equity manager at Northwestern Mutual Wealth Management Company. “The desire of top policymakers is to have it and it’s the strongest it’s ever been. You’ll see rising inflation.”
Wall Street investors and analysts have focused in recent weeks on the potential of the $ 1.9 trillion package of fiscal stimulus planned by the Biden Administration, which aims to alleviate affected households to cause inflation to spiral out of control.
Economists at Oxford Economics said on Friday they expect to see “longer inflation above 2% since before the financial crisis, but it is unlikely to sustainably default 3%”.
Severe inflation can hurt companies if it increases costs, reduces profits and causes stock prices to fall. The value of savings and bonds can also be eliminated with high inflation over time.
Another concern among investors is that runaway inflation, which consolidated in the late 1970s and boosted 30-year mortgage rates by close to 18%, could force the Federal Reserve to reduce its bond-buying program. of $ 120 billion monthly or to raise its benchmark interest rate. above the current target of 0% to 0.25% earlier than expected and scared the markets.
At the same time, it is not unreasonable to argue that some financial assets have already been inflated by the Fed’s policy of low rates and an easy flow of credit, which could be due to some cooling.
US equities, including the DJIA Dow Jones Industrial Average,
S&P 500 SPX index,
and Nasdaq Composite COMP,
closed on Friday with record highs, while debt-laden companies can now borrow on the market for “junk” bonds, or speculative bonds, at historic low rates of about 4%.
Read: A stock market provoked by hopes of stimulus, with which investors count
In addition to rising stocks and bonds, U.S. house prices have also skyrocketed during the pandemic, although the U.S. still needs to recover nearly as many jobs from the COVID-19 crisis as during the worst of the global financial crisis. 2008.
This graph shows that the jobs lost by the pandemic are still close to the levels seen after the last crisis.
Job losses need to be tamed
LPL Research, Bureau of Labor Statistics
Fed Chairman Jerome Powell said Wednesday that he does not expect a “big or sustained” inflation outbreak, while also stressing that the central bank remains focused on recovering jobs lost during the pandemic, as the United States wants to make serious progress on its vaccination program by the end of July.
On Friday, Treasury Secretary Janet Yellen reiterated a call on Friday that now is the time for more fiscal stimulus.
“Broadly speaking, the guide is that it’s harder for me to live a year from now than a year before,” Jeff Klingelhofer, co-head of investment at Thornburg Investment Management, said about inflation in an interview with MarketWatch .
“I think what we need to watch out for is wage inflation,” he said, adding that higher wages for higher-income wage earners were mostly flat for much of the last decade. In addition, many lower-wage families most affected by the pandemic have been left out of the rise of the last decade in financial asset prices and home values, he said.
“For people who haven’t made this trip, it feels like a perpetuation of the inequality that has been at stake for a long time,” he said, adding that “the only way to achieve broad inflation is with a broad overheating of the economy. We have quite the opposite. The lower third is almost not overheated. “
Klingelhofer said it’s probably also a mistake to look at 10-year Treasury benchmark yields to indicate that the economy is overheating and inflation, as “it’s not an indicator of inflation. It’s just a proxy of how it might react. the Fed, ”he said.
10-year Treasury yield TMUBMUSD10Y,
so far it has risen 28.6 basis points to 1,199% as of Friday.
But with last year’s sharp price hikes, is the U.S. real estate 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 rental properties, including those undergoing rehabilitation and construction projects.
“Over the course of the year, there will be more people going back to work,” Beacham said, but added that it is important for Washington policymakers to provide a bridge for households through the pandemic, until they spend. at sporting events, socializing and at concerts. and more may seem again some time before the pandemic.
“Clearly, there will likely be an increase in consumption in the short term,” he said. “But after that it normalizes.”
U.S. stock and bond markets will be mostly closed Monday for Presidents ’Day holidays.
On Tuesday, the only piece of economic data comes from the New York Federal Reserve’s Empire State manufacturing index, followed on Wednesday by a series of updates on U.S. retail sales, industrial production, data from home builders and minutes of the most recent Fed policy meeting. Thursday and Friday provide more data on jobs, housing and business activity, including existing home sales in January.