The major averages finished the week with sharp losses, despite a Friday rebound. Bond buying pushed the 10-year Treasury yield back down to as low as 1.39% after surging above 1.6% at one point. But, stocks and commodities still ended broadly lower. Meanwhile, U.S. personal incomes soared in January as Americans received another round of pandemic relief checks. For the week, the Dow Jones dropped 1.8%, the S&P 500 slid 2.5%, and the Nasdaq tumbled 4.9%
Fed Chair Powell called the recent run-up in yields “a statement of confidence” in a strong economic outlook and played down inflation worries from another big fiscal stimulus package. Powell also said the Fed is in no rush to raise interest rates or begin trimming its $120B in monthly bond purchases in his testimony to Congress.
So where does that leave us? Markets are jittery but the Fed says “calm down”.
Future Wealth’s View
In these uncertain times, it is best to look at economic data. A series of disappointing weekly jobless claims and recent monthly jobs reports have pointed to a U.S. labor market that’s still under considerable strain due to the pandemic. Which is the reason for Powell to emphasize robust stimulus measures. If bond yields continue to rise in response, the Fed might be forced to tighten policy too quickly, while a complacent Fed could pose overheating risks that may destabilize the economy over the longer term. Higher interest rates are no reason for U.S. stock investors to worry given that S&P 500 fared better when yields rose in the prior 12 months than when they fell, according to historical data.
That said, there is sure to be some near term continued sell off, especially in tech stocks, which have run up the most since the major correction in Feb last year. Be sure to pay attention to the February jobless numbers to be released on Friday in the coming week. If jobless claims fall well below what is forecasted, it will be a sure sign that the economy is picking up and that higher interest rates are justified. But, there will be bloodbath on Wall Street.