Yes, you can have too much of the good – and the stock market is starting to consider what that might mean for future gains.
advanced 1.2% to 3934.83 and
achieved 1.7%. All three closed at record highs. What could be wrong with that?
Not much, apparently. The chance for that a huge relief bill being passed has risen so high that the market assumes it is a finished deal. Disappointing financial data, like weaker than expected jobless requirementscontinues to be dismissed. And optimism about our ability to vaccinate the American population and end the pandemic seems to be rising.
But there is a sense of unrest that permeates, a sense that something is not quite right with the markets. You can see it in the continued influence of retail, which found a new old target in pot holdings, which helped drive stocks in
ETFMG alternative fall
listed fund (ticker: MJ) rose 42% through Wednesday and then down 26% to Friday’s close. It is in small-cap Russell 2000, which gained 2.5% on the week to 2289.36 and has now surpassed the S&P 500 by 11 percentage points in 2021. And it’s there in the 10-year government return, which closed the week at 1,199%, which is the highest since March 2020. Do these things make sense? And if so, what do they mean for the overall market?
Part of the problem is simply the known unknowns. For example, no one is quite sure when the economy will reopen and what it will look like. We can assume that there is elevated demand that workers in restaurants, retail and other service-oriented businesses will have jobs to return to, and people will want to fly to holiday destinations again, but we do not know for sure until that happens. “My basic business is that it works well,” says Drew Matus, chief marketing strategist at MetLife Investment Management. “It all boils down to the speed people feel comfortable with again.”
There is also starting to be some concern that there might, just maybe, be too much stimulus down the pike. Details about a possible $ 1.9 trillion package is still being drafted, but President Joe Biden has already held a meeting with senators to discuss an infrastructure plan that could add another trillion or more. This has raised concerns about higher taxes to pay for the plan as well as even higher dividends to reflect the potential for stronger growth – and what they would mean for a market that is already showing signs of foaming.
“The biggest concern for equities was higher taxes / regulation followed by inflation / higher interest rates, although the duration and severity of the pandemic remained a major focus,” Evercore ISIs Oscar Sloterbeck wrote of the firm’s investor survey.
For now, however, the stable gains in bond yields have been good for the market, according to Ned Davis Research strategist Tim Hayes. He notes that the correlation between the return on Barclays Global Aggregate Bond Index and global equities is currently 0.24 – a correlation of 1 means that two assets are moving in lockstep – and has been fairly stable since the market stabilized after coronavirus the degradation. If the correlation becomes negative, which will mean that stocks and bonds move in opposite directions, it could be bad news for stocks.
“If the context were to return to inversion, it would tell us that markets had begun to see rising interest rates as a threat to economic growth, and in turn corporate profits,” Hayes writes.
For now, however, we continue to enjoy the gifts that continue to give.
Write to Ben Levisohn at [email protected]