Despite rising stocks and house prices, inflation in the US won’t be a problem for some time

When America’s amusement parks and ballparks are no longer to serve as mass vaccination sites for COVID-19, some investors believe that households pocketing pandemic government financial aid could start to squander.

While a consumer splurge could initially boost pandemic-ravaged parts of the economy, a bigger concern for investors is that a sustained spending spree could also see prices of goods and services rise dramatically, depressing values. of financial assets and ultimately increase cost. to live for everyone.

“I don’t think inflation is dead,” said Matt Stucky, Northwestern Mutual Wealth Management Company equity portfolio manager. “The desire of key policy makers is to have it, and it is the strongest that has ever existed. You will see an increase in inflation. “

Investors and analysts on Wall Street have become obsessed in recent weeks with the potential of the $ 1.9 trillion fiscal stimulus package planned by the Biden Administration that aims to relieve the worst-hit households to make the inflation gets out of control.

Economists at Oxford Economics said on Friday that they expect to see the “longest inflation extend above 2% since before the financial crisis, but it is unlikely to sustainably exceed 3%.”

Severe inflation can affect companies by increasing costs, reducing profits, and causing stock prices to fall. The value of savings and bonds can also be affected by high inflation over time.

Another concern among investors is that runaway inflation, which took hold in the late 1970s and raised 30-year mortgage rates to around 18%, could force the Federal Reserve to reduce its bond purchase program from $ 120 billion per month or increase your benchmark interest rate. above the current target of 0% to 0.25% earlier than expected and scare the markets.

At the same time, it is not unreasonable to argue that some financial assets have already been inflated by the Fed’s accelerating policy of low rates and easy credit flow, and could be due to a cooling down.

US stocks, including the Dow Jones Industrial Average DJIA,
+ 0.09%,
S&P 500 SPX Index,
+ 0.47%
and Nasdaq Composite COMP,
+ 0.50%
It closed at record highs on Friday, while debt-laden companies can now borrow on the market for “junk” or speculative grade corporate bonds at historically low rates of around 4%.

Read: Stock market stoked by hopes of stimulus: what investors are counting on

In addition to the recovery in stocks and bonds, US house prices have also skyrocketed during the pandemic, even though the US still needs to regain nearly as many jobs from the COVID-crisis. 19 as during the worst of the global financial crisis in 2008.

This graph shows that the jobs lost to the pandemic remain close to the levels seen after the last crisis.

Job losses must be controlled

LPL Research, Bureau of Labor Statistics

Fed Chairman Jerome Powell said Wednesday that he does not expect a “large or sustained” inflation outbreak, while emphasizing that the central bank remains focused on recovering jobs lost during the pandemic as the United States hopes to move forward. seriously on your vaccination. program at the end of July.

Treasury Secretary Janet Yellen reiterated an appeal Friday that now is the time for more major fiscal stimulus.

“Generally speaking, the guideline is, is it harder for me to live within a year than the year before?” Jeff Klingelhofer, co-chief investment officer at Thornburg Investment Management, said of inflation in an interview with MarketWatch.

“I think what we have to watch is wage inflation,” he said, adding that higher wages for higher-earners were mostly stable for much of the last decade. Additionally, many lower-wage households hardest hit by the pandemic have been left out of the last decade’s spike in financial asset prices and home values, he said.

“For people who haven’t taken that trip, it feels like a perpetuation of inequality that has been developing for some time,” he said, adding that “the only way to achieve broad inflation is with a widespread overheating of the economy. “. We have the exact opposite. The lower third is not close to overheating. “

Klingelhofer said it is also probably a mistake to look at benchmark 10-year Treasury yields for signs that the economy is overheating and inflation is “not an indicator of inflation.” It’s just a representation of how the Fed might react, ”he said.

The 10-year Treasury yield TMUBMUSD10Y,
it’s up 28.6 basis points so far this year to 1.199% as of Friday.

But with the sharp price increases last year, is the US housing market at risk of overheating?

“Not at current interest rates,” said John Beacham, founder and CEO of Toorak Capital, which finances apartment buildings and single-family rental properties, including those in rehabilitation and construction projects.

“Over the course of the year, more people will go back to work,” Beacham said, but added that it’s important for lawmakers in Washington to provide a bridge for households through the pandemic, until they spend on socializing, sporting events, concerts. and more can revert to a pre-pandemic era.

“Clearly, there will probably be an increase in consumption in the short term,” he said. “But after that it normalizes.”

The US equity and bond markets will be mostly closed on Monday for the Presidents’ Day holiday.

On Tuesday, the only economic data came from the New York Federal Reserve’s Empire State Manufacturing Index, followed on Wednesday by a series of updates on retail sales, industrial production, and US homebuilders data. And the minutes from the Fed’s most recent policy meeting. Thursday and Friday bring more data on jobs, housing and business activity, including existing home sales for January.


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