Market Commentary — March 1, 2021
Stocks continued to pull back in response to higher interest rates and inflation fears. The S&P 500 posted its biggest weekly decline in a month, while the NASDAQ Composite Index experienced its worst decline since October.
Last week, the yield on the 10-Year Treasury spiked to 1.5%. The fear is that higher yields on long-term bonds and inflation concerns could spark an exodus from equities into fixed income. Given the still low rates being paid by bonds, this “substitution effect” argument seems a little preposterous. But we will likely see a market leadership change, with a rotation out of high-valuation tech names into companies that represent a better value and those benefiting from the re-opening trade.
Even if the Fed remains committed to keeping short-term interest rates low to restore employment, all the cheap dollar liquidity and fiscal stimulus sloshing around have driven up asset prices like stocks, commodities, and bitcoin.
Pumping even more liquidity into the system, the House passed a $1.9 trillion Covid relief bill offering $1,400 direct payments, a $400-a-week federal unemployment bonus, a per-child allowance of up to $3,600 for one year, and billions of dollars to distribute vaccines and to assist schools and local governments.
The bill also includes a provision to increase the minimum wage to $15 per hour, phased in over four years. But that provision is expected to die in the Senate.
Inflation? What inflation?
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