Stocks are shooting higher for longer
Markets are screaming higher and nothing seems to be in its way. Normally, stocks would take a break after a dramatic run-up. This is no longer the case, apparently, as the S&P500 is up 12.5% so for this year. Having priced in an early recovery, US stocks have been in an uptrend since March of 2020 after a dramatic drop the month prior. But how long can this uptrend continue and shouldn't we expect a correction to make equilibrium?
Pricing the stock market is a difficult task. Consumer demand is still currently flat due to the still very active pandemic, but expectations hold no bounds. The Biden administration could pass another round of stimulus worth $2tn entirely designed to boost jobs and enhance Infrastructure. The consequence could be uplifting for future generations, who would benefit from $250bn in R&D and high-speed rail, finally putting the US on the same level as most other developed nations. The economic benefit is limitless so it may be impossible to determine the right price that markets should be at.
With record low-interest rates, President Biden is right to borrow as much as possible to stimulate growth. This Is the beauty of the interest rate monetary system. When it's cheap to borrow, take advantage of it! Nevertheless, once the economy heats up, interest rates are likely to climb. This would cool the economy; it would be more expensive to borrow. Hopefully, by that time the U.S. would be close to full employment, bridges would be rebuilt and there would be little need to borrow further.
Technically, it's impossible to sustain a stock uptrend without a correction, even if it's a minor one. Some stocks have also faired less than others, such as emerging markets and energy have been relative underperformers as of late. Government bonds took a deep dive as interest rates crept higher. Mortgage rates hit a year high of 3.18% only to settle at 3.04%, per the St. Louis Fed (30 yr). I would expect markets to find equilibrium either by correcting or growing at a much slower rate in the near term.
Investors should check their risk tolerance and scale back on risk as appropriate. A major correction is always a possibility and investors shouldn't risk more than they can afford to lose. Nevertheless, U.S. and European stocks look very optimistic over the intermediate term. I would expect to see further gains in financials, tech, and oil & gas, as they tend to be benefactors of rising rates. There's a need for caution in "safe" instruments, such as money markets and government bonds. Since money markets usually invest in government securities, if bonds implode suddenly, there might be a situation of no liquidity in money markets.
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