Market Pulse: Stimulus leads to a booming economy
The economy is ripping along and recent reports on manufacturing, jobless claims, retail sales, new home sales, confidence and employment underscore how strong growth is and will be this year. CEOs are optimistic, too.
First quarter GDP growth was 6.4% and will be closer to 10% in the second.
Here is a key question: Should interest rates remain so low in a booming economy? Many would say no, but the Fed wants to first see the unemployment rate fall to its 2019-20 low (3.5%) and stay there for months before considering a boost. Why 3.5 percent? Why not 4.5%? Or 5%? After all, 3.5% was a record low and was well below what had been considered “full employment.” Does congress and the administration need to throw trillions more at the growing economy to spur faster growth? No, because inflation is clearly a rising risk and will be.
There is already a surge in commodity prices, especially lumber. That puts upward pressure on inflation and on interest rates. The yield on the 10-year Treasury is at 1.63% and a move toward 2% this year seems to be in the cards. Year-over-year growth in money supply is about 40%. The implications for inflation are clear … and not good. The bond crowd will be watching.
But the credit markets show little evidence that people are genuinely concerned about inflation surging anytime soon. What they show is optimism that debt will be more secure as the economy recovers and expands. I see it in junk bonds, business development companies like Ares Capital and Prospect Capital, and low-rated preferreds, all of which are rising. iShares Preferred Stocks ETF (PFF) reached a new annual high. It is hard to find a bargain in the fixed-income and preferred market.
As for stocks, Blackrock CEO Larry Fink is “incredibly bullish” on the stock market, citing the massive amount of money on the sidelines that will be put to work. Yes, as I’ve said again and again, money has to go somewhere. Much will go to stocks, primarily here but also overseas. Fink is not concerned about deficits, but he said unless we have 10 years or more of solid growth they will become a problem.
Solid growth, he added, is at least 3% annually. For 10 years? Really? There were only two years where growth exceeded 3% during the Obama and Trump years.
Bottom line: Stocks are where they are because investors anticipated the strong economic data we are now seeing, and prices will rise as investors anticipate even more good news to come. They are right.
David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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