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Yesterday, the S&P notched its third straight loss and the Nasdaq turned negative
on the year, briefly falling into the dreaded "correction territory"—a
10% drop from its most recent closing high. Like our declining attention
spans and Soylent, you can blame this one on Big Tech, whose shares,
once the biggest winners of our WFH world, have dragged the indexes down.
- Other
industries are doing better, particularly "cyclical" stocks like finance
and energy that typically gain during periods of fast growth,
inflation, and higher interest rates.
Speaking of fast growth, inflation, and higher interest rates...
They've
really spooked markets the last few weeks. As Congress nears another
round of stimulus, investors expect supercharged economic growth (nearly
5% this year) and more inflation. Inflation worries have sent bond yields—still
low by historic standards—spiking, making investors worry that the Fed
will raise interest rates to put a brake on the economy and keep
inflation in check.
Yesterday, they turned to Fed Chair Jerome Powell for a reassuring hug. In an interview with the WSJ, Powell said that while he expects some inflation ahead, he doesn't think it'll last and the Fed will keep interest rates near zero.
- That sounded
reassuring, but investors are still feeling nervous about inflation and
the Fed potentally hiking rates. They continued to drop stocks and
bonds, sending yields higher.
What is Powell seeing?
Before he
raises interest rates, Powell wants inflation to hover around the Fed’s
2% target and see unemployment low again. He doesn’t expect either of
those to happen this year.
- The consumer price index, a measure of annual inflation, was most recently measured at 1.4%.
- Last week, jobless claims rose to 745,000. Private payrolls added 117,000 jobs in February, ADP estimates, well shy of the 225,000 economists predicted. The Labor Department releases its February jobs numbers today.
Interest rates aren't the only monetary policy tool. The Fed could
also try buying longer-term bonds to push yields down, or capping
yields and committing to buying as many bonds as needed to keep things
there.
Bottom line: "We will be patient," Powell said. "We're still a long way from our goals."
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