Treasury rates have ticked higher in recent weeks, due to investor worries about a pickup in inflation. This is not a new concern, but has gained steam as a large ($1.9 tril.) stimulus package appears to be on the verge of passage in Congress, as well as the economy showing signs of broader recovery otherwise, with help from prior stimulus.
We don’t like to spend too much time on market anomalies, let alone individual stocks that fall outside long-term asset allocation principles, but this seems to have taken over the headlines last week. Rarely do stock market quirks become mainstream news; in this case, it carried over to market sentiment to some extent and definitely raised trading volumes.
Each year naturally brings more surprises than certainties, so outlooks and predictions of any kind quickly become futile. (We’ve already experienced a dramatic and unusual first week of January.) At least at this point in time, noted are a few key issues to monitor as 2021 gets going:
The prior weekend, Congress had agreed on a $900+ bil. Covid relief package, approved by both chambers a few days later, and finally signed by the President last night. This had been in the works for months, with a few key sticking points causing the long delay and repeated breakdowns in negotiations between Democrats and Republicans.
It’s a new high, but not dissimilar to celebrating say, 29,999 as a new peak, although the odd number didn’t receive the same level of media attention. These round market levels, whether it be the Dow Jones Industrial Average, Nasdaq, or others, tend to generate high visibility (especially in the slower post-election news cycle). If an index is old enough, and tends to show positive performance (as stocks have over the long haul), you’ll end up reaching new and higher milestones.
Whether or not an asset class is in a bubble is difficult to answer in real-time, since sentiment can change course as quickly as a few weeks, or take years. In hindsight, these things are always more obvious. The question can be viewed through a few different perspectives:
The election results may have surprised some forecasters (and certainly pollsters), as the predicted ‘blue wave’ of Democrats capturing both the Presidency and Senate fell short. Democrats did retain the House of Representatives, as anticipated, although more seats than expected were lost.
What would be the impact of a Trump Presidential reelection for a second term? How important is the President on financial markets anyway? In many ways, policies to expect would likely be similar to what’s in place today, and largely opposite of those proposed under a Biden administration discussed a few weeks ago. At the same time, Trump’s policies have not followed ‘traditional’ Republican ideologies from decades past in a variety of areas. The Senate Republicans have been far more predictable from a policy standpoint, as have the Congressional Democrats.
What causes sudden market declines like we saw this week, seemingly out of nowhere? There often isn’t a concrete reason. It’s important to remember that stocks trade in a market like any other good: when there are more buyers than sellers, prices move higher; when buyers dry up, this can reverse quickly.
What would be the impact of a Biden Presidential election win, potentially including a Democratic takeover of the Senate? The impact of a potential new President on stock market returns is always a key question in the weeks prior to a general election. It’s important to keep in mind that, despite frequent worries around this time of year, and that financial markets may react in the shorter-term term to poll results and election outcomes (especially surprises), the longer-term effects of any administration’s policies appear to be disconnected from financial market results. Instead, stocks especially tend to follow earnings, which follow economic growth trends.