Will America’s “healthy reflation” end in inflation?
Democratic control of the US Congress would give Joe Biden huge scope to stimulate the economy. But willie mean a “healthy reflation” for the economy or will things go too far, triggering inflation?
Has the stockmarket caught vertigo? US indices ended 2020 on record highs, with the S&P 500 registering a 16.3% gain for the year. The tech-heavy Nasdaq soared by 43.6%, its best annual performance since 2009. The end-of-year cheer was helped by last-minute agreement on a $900bn pandemic stimulus package in Washington. But things reversed on the first trading day of 2021: the S&P 500 fell back 1.5%, its biggest one-day drop since the end of October.
Stocks wobble…
By mid-week traders were digesting the results of two tight elections in Georgia that looked likely to give the Democrats control of the US Senate. The prospect of Democrats taking the “trifecta” of the White House and both houses of Congress raises the risk of tech regulation, says Randall Forsyth in Barron’s. The “blue wave” is back and with it memories of September when tech stocks tumbled back to earth. Nasdaq futures contracts fell by more than 1% in response to the results.
Equity markets remain generally bullish, but don’t expect a smooth ride this year, says Michael Mackenzie in the Financial Times. US valuations are more stretched than they were a year ago – never mind the small matter of a pandemic. In some ways this is a “rational bubble”: ultra-loose monetary policy pushes even reluctant investors into the stockmarket in search of returns. The general direction may be up, but at these levels highly strung stock prices are acutely sensitive to bad news. I expect at least one “serious wobble at some point” over the coming 12 months.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The market is “fussing” over the Georgia elections, says Stephen Innes of Axi. Things are likely to settle once Wall Street digests the news. Biden’s administration has no intention of raising taxes in the near-term for fear of killing the recovery and spending is set to soar. Before too long resolutely bullish traders will have concluded that this is “close to a best-case scenario”.
... but the real action is in bonds
Democratic control of Congress would give Biden “huge scope” to stimulate the economy, writes Liam Halligan in The Sunday Telegraph. He has suggested a “vast infrastructure programme” to renovate roads and airports that could cost about $3trn. The market could end up cheering all the extra cash, but an additional “lather” of stimulus on top of already unprecedented monetary support will leave markets “deep in bubble territory and detached from reality”. The likelihood of more US government spending sent ten-year Treasury yields – the benchmark of the US government’s borrowing costs – above 1% for the time in nine months.
The key question now is whether all that stimulus means “healthy reflation” for the economy or whether things go too far, triggering inflation, says John Authers on Bloomberg. There are certainly reasons to worry. Commodity prices have spiked. The US savings rate hasn’t been this high since the 1970s, which could bring a consumer spending wave later this year that will push up prices. Democrat control of the Senate makes inflation more likely, not less.
-
Barclays warns of significant rise in social media investment scams
Investment scam victims are losing an average £14k, with 61% of those falling for one over social media. Here's how to spot one and keep your money safe
By Oojal Dhanjal Published
-
Over a thousand savings accounts now offer inflation-busting rates – how long will they stick around?
The rate of UK inflation slowed again in March, boosting the opportunity for savers to earn real returns on cash in the bank. But you will need to act fast to secure the best deals.
By Katie Williams Published
-
The industry at the heart of global technology
The semiconductor industry powers key trends such as artificial intelligence, says Rupert Hargreaves
By Rupert Hargreaves Published
-
Three emerging Asian markets to invest in
Professional investor Chetan Sehgal of Templeton Emerging Markets Investment Trust tells us where he’d put his money
By Chetan Sehgal Published
-
What to consider before investing in small-cap indexes
Small-cap index trackers show why your choice of benchmark can make a large difference to long-term returns
By Cris Sholto Heaton Published
-
Why space investments are the way to go for investors
Space investments will change our world beyond recognition, UK investors should take note
By Merryn Somerset Webb Published
-
Time to tap into Africa’s mobile money boom
Favourable demographics have put Africa on the path to growth when it comes to mobile money and digital banking
By Rupert Hargreaves Published
-
M&S is back in fashion: but how long can this success last?
M&S has exceeded expectations in the past few years, but can it keep up the momentum?
By Rupert Hargreaves Published
-
The end of China’s boom
Like the US, China too got fat on fake money. Now, China's doom is not far away.
By Bill Bonner Published
-
Magic mushrooms — an investment boom or doom?
Investing in these promising medical developments might see you embark on the trip of a lifetime.
By Bruce Packard Published