The separation yields of treasury bonds were the key factor in supporting the stock market since the coronacrisis broke out almost a year ago. However, excessive liquidity from the federal reserve system and the government, as well as the expectation of the new package of stimulating measures and the strong growth of the economy after mass vaccination, ensured a very rapid increase in profitability. In the 10-year treasury bonds, yield this week rose to 1.3%, although at the beginning of the year there were about 0.9%.
The market was thinking about inflationThe monthly growth rate of profitability in February may be one of the fastest since 2018. Investors began to think about whether the increase in the cost of borrowed funds and discount rates, the guideline for which serves the profitability of governmentobaliations, problems for the stock market.
"The stock market will be able to calmly digest a gradual increase in profitability during this and next year," says Kiran Ganesh, UBS Global Wealth Management strategist. - But if this happens quickly, it can lead to more significant problems. "
The prospect of the allocation of another $ 1.9 trillion from the budget, the implementation of deferred demand from consumers after the cancellation of multi-month social restrictions and the preservation of the Fed monetary policy has led to an increase in inflation expectations until perennial levels. The so-called 10-year-old break-even rate (10-year Breakeven Rate, the difference between the yield of 10-year-old ordinary treasury papers and bonds protected from inflation, TIPS), which is used to evaluate the expected inflation, increased to 2.2%, high levels Since 2014
In the meantime, a preferred Fed inflation indicator, a basic price index for personal consumer spending (excluding food and energy products), is 1.5% (Data for December). This is noticeably lower than the long-term goal of the Fed in 2%. Another indicator, the consumer price index, has not changed in January compared with December, and in annual terms grew by 1.4%.
Since bonds are a fixed-income tool, inflation eats payments on them that investors receive.
It is usually considered that moderate inflation is good for the stock market. With low, but gradually accelerating inflation, the US stock market is growing with a leading pace in 90% of cases, according to the calculations of Sean Markovic, the investment strategist of Schroders.
But too rapid price increases can hit quotes that are so on historical maxima, especially in the overheated technological sector. An increase in production costs as a result of inflation will lead to a decrease in corporate profits. A growth in profitability and interest rates reduces the current value of future cash flows, thereby reducing the value of companies in estimated models. "When accelerating inflation, the market will often have to discount these future cash flows at a higher rate to compensate for the fact that their value in today's money is less," explains Markovitz.
In front of investors, it is now worth a difficult task - to determine when the inflationary pressure becomes too high. "It is difficult to indicate a specific value," said Jeffrey Palma, Director of Investment in State Street Global Advisors. But with a break-even bet "essentially" above 3%, the situation in the stock market will become "slightly less sustainable".
According to the analysis of historical data, which recently spent Goldman Sachs, yield should grow for a month by 0.36 percentage points so that the stock market is stuck. According to Dipaca Pura, the Director for Investments in the US markets of Deutsche Bank Wealth Management, the yield of 10-year treasury bonds "should exceed at least 1.75% to begin seriously influence the opinion of investors that the stock market is the best place to invest "
The preservation of increased inflation expectations can lead to a rebalancing on the market, reducing the demand for shares in fast-growing sectors, such as technology, and supporting sectors that have long lost the favor of investors. Among the latest are financial and energy companies whose shares are usually growing faster at accelerating inflation. "The general approach here is to invest in the company that the strongest depend on the stage of the economic cycle. Improving the economic situation Most of all helps companies that are considered more weak, "says Jonathan Golub, the main strategist in the US stock market Credit Suisse.
Hold your ear in EgorThe situation may exacerbate in the summer, some investors believe. According to their forecasts, the economy will be rapidly recovered by that time, including thanks to additional influxation from the budget. Janet Yelevin Finance Minister recently repeated that in the issue of budget support of the economy you need to "act in large". And the Chairman of the Fed Jerome Powell stressed that she was ready to continue to "patiently conduct a stimulating" monetary policy.
"At some point in summer, inflation will be higher than the goal [Fed] and will continue to accelerate, GDP will grow rapidly, and interest rates will be kept near zero, and the Fed - continue to run money, - predicts Ganesh. "The Fed tells us that everything will be fine, and we think that everything will be fine ... but it probably gives a certain nervousness."
Nervousness can change fears, warns Golly: "If the growth of consumer prices becomes uncontrollable, investors in the stock market will perceive it very badly."
Translated Mikhail Overchenko