Why is this bull market not showing that it is coming to an end soon

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The economic data last week largely reflected the market’s confirmation that a rapid recovery is underway. Rotation rates rose, bonds fell, and investors laid their hands on higher yields threatening the stock market.

January sales jumped 5.3% from December and 7.4% from a year earlier, beating expectations – and the January producer price index surprised the upside. Thursday morning jobless claims figures for the most recent week broke a several-week trend, while the previous week’s account was revised higher. But then on Friday, February PMI from IHS Markit firmly stressed the health of the recovery: The manufacturing subindex remained slightly below its recent high, while the part hit six-year high services.

Atlanta Fed’s GDPNow model now marks real gross domestic product growth at a whopping 9.5% per annum in the first quarter. It had been below 5% just 10 days earlier, and comes before any stimulus from a $ 1.9 trillion incentive package.

The

Dow Jones business average

rose 35.92 points, or 0.11%, to 31,494.32 last week. The

S&P 500

index slipped 0.71%, to 3906.71, and the

Nasdaq Composite

lost 1.57%, to 13,874.46. Meanwhile, the yield on the U.S. Treasury 10-year note rose 0.145 percentage points, to 1.344%, as the price of securities fell. Indices near high levels and rising yields have been the underlying dynamics since the end of last year.

“The market paints a picture of optimism: strong growth and rising inflation, but not sadly. We agree, ”wrote US BofA Securities economist Michelle Meyer – which sees GDP grow by 6% in 2021 – on Friday. “But there is a calm balance: strong growth could encourage a faster rise in rates, rising borrowing costs and pressure on risky assets, limiting the upside to economic growth.”

That “fine balance” means that investors could soon be playing the kind of mind games that many will remember from the first half of 2019. Back then, economic data was not good. -always is good news for the stock market, as it seems to have reduced the numbers of the flat rate the Federal Reserve will eventually cut by. If 2021 economic data continues to be a surprise, faster inflation and the pace of recovery could cause the Fed to get off the gas faster than expected, it is thought, and that could threaten the bull market.

This period is slightly different, however, for a number of reasons. Criteria flat rates are as low as they can be without being negative, and the Fed has made it clear that it will pick up times of higher inflation to make up for past deficits. Rate increases are off the table so that the economy and employment are in much better shape than they are now. Chairman Jerome Powell seems to confirm that at his Congressional testimony next week.

And those worries avoid production rising for the right reasons – as the economy recovers, and as financial markets recover from an unprecedented panic. -ever.

“If employment growth continues to show improvement, you can embrace higher bond yields,” says Steven DeSanctis, Jefferies ’equity strategy.

Keith Lerner, chief market strategist at Truist Consulting Services, looked at 16 postwar times in which yields rose. The S&P 500 went up in 13 of these windows, with an annual total yield of 13%. In other words, rising rates and rising stocks go hand in hand more often than not. Parallelism may be appropriate in 2009, when 10-year Treasury yields grew 1.6 percentage points and the S&P 500 returned 26%.

“The pull of the war will take over many and when the Fed flinches injects volatility, but I don’t think that will end the bull market,” he says. “It just moves us to the next step.” A developing economy should reduce companies ’credit risk, Lerner notes, so the cost of capital doesn’t have to move up nearly as much as it does. will produce.

Yes, below the surface there will be winners and losers from a higher yield background. High-end stocks will be the same as those of many high-yield software companies. Subsidiary bonds as a resource appear to be less attractive compared to risk-free finance.

But the economic recovery will be reflected in higher incomes and earnings across the market. As long as those come back faster than rising yields / weight gain prices, there is no reason why the bull market should end. Another conversation is long-term inflation. But for now, there are better things for stock investors to worry about than the faster-than-expected economic recovery in 2021.

Write to Nicholas Jasinski at [email protected]