A round of late afternoon buying boosted the DJIA to another record high on Friday as rising optimism around the global economic reopening continued to encourage the rotation into cyclical stocks. But surging bond yields rekindled valuation fears in the big tech names, dragging the Nasdaq down. On the other hand, Congress gave the final green light to President Biden’s $1.9T economic stimulus plan. The consensus among economists is that the stimulus will boost the economy and supercharge the recovery. But, that has also raised concerns that the sheer scale of the spending could lead to a spike in inflation. While many are concerned about inflationary effects, the Fed has been vocal that it has no immediate plans to tighten monetary policy.
On the pandemic front, the U.S. appears to be close to emerging from the economic hole dug by the coronavirus, and on the path to its biggest expansion in decades. President Joe Biden set July 4 as a goal for the country to begin returning to normal. Still, millions remain without work and the pandemic continues to rage.
Future Wealth’s View
It is clear from looking at the choppiness in the stock market that the coming rebound worries stock investors who have to recalibrate due to rising treasury yields. In a rising interest rate environment, bonds are no longer a good option for investors. Which means there will be a rotation from bonds into equities. But, the question is which sector of equities will benefit from the influx of new money?
The last month appears to be indicating to us that there is a rotation within equities as well. Money has clearly moved from technology to value with energy, industrials and financials benefitting the most. But we, at Future Wealth LLC, believe that to abandon technology stocks in favor of value will be a short sighted move.
And so, the challenge for investors becomes one of keeping a fine balance between growth and value while paying attention to shifting interest rate and inflation environments. It is a full time job. Get ready for it!