“The recession is effectively over” in America, says Michael Wilson of Morgan Stanley. Progress on vaccinations combined with another huge round of fiscal stimulus means “it’s hard not to imagine an economy... on fire later this year”.
Get ready for the Biden boom
By the middle of the week the US Congress was in the final stages of approving a $1.9trn (£1.4trn) Covid-19 relief bill. The package includes another round of $1,400 stimulus cheques to be distributed to US households and extends unemployment support measures. The bill also includes $350bn for state and local governments and targeted support for small businesses, hospitality and airlines.
There isn’t much economic pain left for the relief bill to relieve, says Irwin Stelzer in The Sunday Times. The economy created 379,000 jobs last month. Measures of service-sector and manufacturing activity have roared back since the start of the year. Yet with unemployment still at 6.2%, policymakers say the recovery still needs plenty of support. The result will be an economic “boom that will be heard…around the world”.
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
Stockmarkets are not joining in the fun. The S&P 500 was flat over the past month, while the technology-heavy Nasdaq Composite index has officially entered a correction (defined as a 10% fall from a recent peak), reports Julia Horowitz for CNN. Shares in tech giants have taken the worst hit, with Apple shares 18% off a January high and Amazon down by 12% in six weeks. As tech giants have lagged, cyclical shares have done better. The FTSE 100, skewed towards energy and banks, has gained 3% over the past month.
The cause of the rotation
As John Authers on Bloomberg explains, the “underlying driver” of this “rotation” is the bond market. The yield on the US ten-year Treasury has risen from 0.9% at the start of the year to almost 1.6% this week as investors prepare for economic recovery.
The pricey tech shares that flourished during the pandemic are now being marked down, while higher bond yields make stocks less appealing generally. Bond yields move inversely to prices, so rising yields also mean losses for bondholders. “Broad baskets of US and global government debt have declined more than 3% since the start of January”, says Michael Mackenzie in the Financial Times. That is a big deal in the staid world of bond investing: “The main US Treasury index” hasn’t lost money since 2013. The real “puzzle” is not why bond yields are rising but why they “stayed so low for so long”, says Roger Bootle in The Daily Telegraph. The UK ten-year gilt yield has fallen from 15% in 1981 to 0.7% today. It’s been a long time since bond markets were able, as Bill Clinton’s adviser James Carville once quipped, to “intimidate everybody”. In recent years “bond markets were not intimidating anybody” thanks to quantitative easing: central banks were buying up bonds with printed cash, while “investors fell over themselves to lend to governments – sometimes even at negative rates”. Yet if yields keep ticking up then there could be “many a sleepless night”.
-
Is it time to ride the recovery in emerging markets?Interview What's the outlook for emerging markets? Gustavo Medeiros, head of research at Ashmore Group, gives his analysis and reviews progress in developing economies
-
Could the Enterprise Investment Scheme cut your tax bill?The Enterprise Investment Scheme is tax-efficient and potentially lucrative. Taking a chance on the scheme could trim your family’s IHT bill, says David Prosser
-
'Ride the recovery in emerging markets': Gustavo Medeiros of Ashmore Group tells MoneyWeek
Interview What's the outlook for emerging markets? Gustavo Medeiros, head of research at Ashmore Group, gives his analysis and reviews progress in developing economies
-
What is the Enterprise Investment Scheme and should you have one?
The Enterprise Investment Scheme is tax-efficient and potentially lucrative. Taking a chance on the scheme could trim your family’s IHT bill, says David Prosser
-
The alcohol industry is suffering as consumers sober up – is it still worth investing in the sector?Changing consumer tastes are rocking the alcohol industry, but the best players are adapting their strategies. Buy them while their shares are still cheap
-
A strange calm in creditCorporate bond markets remain remarkably relaxed, with yields that offer little compensation for risks
-
The City's big bet on green finance fails to pay outOpinion Insurers and banks are backing away from “green finance”, and there is not much sign of the green boom we were promised. That’s a problem for the City
-
Six top investment trusts for smaller stocksLiquidity constraints mean investment trusts are best placed to seize the juiciest opportunities
-
Why is English football thriving – and can it last?What has gone so right for English football? The national team has found its feet; the Premier League is swimming in money and profits are soaring
-
Could colour diamonds add a sparkle to your portfolio?Diamonds of various shades never go out of fashion, says Chris Carter
