Why are stocks down today? So many things appear to be looking up. Covid-19 statistics are improving, jobless claims are down and the U.S. Food and Drug Administration could authorize a third vaccine this weekend. Still though, the major indices have had a rough few days. Here is what you need to know.
The first part of the equation is fear. Specifically, fear of inflation. Investors are eyeing the $1.9 trillion stimulus package from President Joe Biden, which continues to garner support from Democrats and large corporations. Some believe it is too large, and that at this point in the pandemic, all the extra money flowing into the economy will spell trouble. Investors are also worried about near-zero interest rates from the Federal Reserve and growing whispers of a $15 minimum wage.
Historically, as inflation rates increase, so too do bond yields. We are starting to see that now. In the past week, 10-year U.S. Treasury note yields have climbed from 1% to 1.5%. Yields on the 10-year note have been gaining since mid-February, but as Jacob Sonenshine wrote for Barron’s, they recently got another kick. News that Johnson & Johnson (NYSE:JNJ) could receive FDA approval for its Covid-19 vaccine as early as Saturday got yields into motion. A one-shot regimen and faster vaccine rollout support the case for reopening, and therefore for rising inflation.
Now where do stocks come in? They are the third part of the equation here. Inflation rates increase, bond yields increase and stocks fall. As Sonenshine puts it, stocks, especially tech stocks with long-term growth prospects, are sensitive to changes in interest rates. This explains why names like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) are all down today. With yields rising and bonds looking relatively more attractive, these tech stocks are at least temporarily losing their luster. Investors should also note that tech stocks were largely responsible for powering the market out of its early Covid-19 rut.
Why Are Stocks Down Today?
So now that we know why stocks are down today, it is important for investors to understand what this all really means.
The Federal Reserve has given Wall Street a bad case of the jitters. The 10-year yield increase might not make headlines, but its impact is clear: Stocks have something to worry about. Yes, the Federal Reserve and Congress keep pushing ahead with stimulus measures. However, there may be good reason for these endeavors. And, depending on who you ask, there may not be any need to worry.
Take Fed Chair Jerome Powell. Trying to address investor concerns, he spent some time this week going over the interest rate and inflation question. He said that any near-term spike in prices is not something for investors to worry about. In fact, Powell is committed to the idea that the U.S. economy still needs a helping hand in the form of near-zero interest rates and bond-buying programs. If the central bank keeps up its work, we could give the economy a boost and put these near-term fears in the back of our minds.
Powell is not alone in that opinion. Sonenshine wrote that stocks are still relatively more appealing right now. And UBS Chief Economist Paul Donovan similarly looked to brush off inflation fears. According to Donovan, yes, we will see headline consumer price inflation in 2021 that is higher. Importantly, while inflation will rise, it will not truly be “high.” This change in inflation will come from oil prices and reopening-fueled consumption patterns.
The bottom line? Donovan says any temporary spike in inflation is one to ignore.
On the date of publication, Sarah Smith did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Sarah Smith is a Web Content Producer with InvestorPlace.com.
