Financial Markets & Economies Week 8
Markets were on a slight decline in the beginning of the week where tech stocks took the lead and value stocks held their own. Oil prices retracted from recent highs as well. Fed Chair, Jerome Powell, announced mid-week that the U.S. economy is improving but stated that it is doing so unevenly. The Fed plans to keep the interest rates low for the coming years and will continue to buy government bonds. The markets started moving back upwards after Powell’s comments with the DOW reaching new all-time highs. This reversed again later in the week due to surging bond yields. As mentioned in the previous newsletter, inflation is still fairly low overall but is observed in commodity prices. The U.S. housing market is also seeing higher prices.
Earnings season is over and most companies performed better than expected in Q4 and 2020 as a whole. Bond yields are rising making fixed income investments a little more competitive compared to previous quarters. All by all, everything is pointing towards increased spending which in turn is likely to trigger inflation. The chart below shows the effect of inflation on real returns. The Fed’s 2% target inflation rate is thus right in a sweet spot. Anything higher than 3% significantly hurts earnings. With the expectation of a spending boom and the fear of inflation, an inflation protected/ resistant portfolio becomes a must.