The Stock Market is "Propelling a Global Celebration"
Spurred on by renewed optimism about the post-pandemic recovery and a strong fear of missing out, investors keep pushing stocks higher.
What's happening: The Dow Jones Industrial Average closed above 34,000 for the first time last week as Wall Street celebrated a strong start to corporate earnings season.
The US economy is rebounding thanks to stimulus and Covid-19 vaccines. Retail sales went through the roof in March; the housing market roared back to life and the number of people filing for unemployment claims plunged last month. And all of that follows the blockbuster March jobs report.
But US stocks aren't the only ones getting love. MSCI's broad gauge of global stocks covering 23 developed and 27 emerging markets just hit an all-time high, too, while Europe's Stoxx 600 index is on track for its seventh consecutive week of gains.
For now, investors have set aside their concerns about inflation, which could encourage policymakers to start hiking interest rates or tapering bond purchases sooner than expected. A sense of calm has been restored to global bond markets which have facilitated a renewed rally in risky assets like stocks.
But there's a notable exception. Stocks in China have come under pressure since February as Beijing has cracked down on tech companies. Investors are also worried that China, which is recovering from the pandemic faster than other major economies, could pull back stimulus over the course of the year in a bid to contain rising debt risks.
Last week, China's economy posted its strongest quarterly growth on record, expanding 18.3% year-on-year in the first three months of 2021. The jump reflects the deep slump in activity in early 2020 but keeps China on track for growth of between 8% and 9% in 2021.
A removal of support
A withdrawal of support from policymakers isn't just a risk in China. European Central Bank President Christine Lagarde has also cautioned that governments should be careful not to "brutally" withdraw job guarantees and income support before the time is right.
That will be especially important as another wave of infections sweeps many parts of the world, forcing countries to return to lockdowns. Differing paces of vaccine campaigns, in addition to the trajectory of infections, could cause the performance of some markets to diverge in the coming weeks.
While the latest data show that the recovery in the US is being supercharged by a combination of fiscal stimulus and relaxation of restrictions, for much of the rest of the world, vaccine setbacks and worsening virus outbreaks will delay economic recoveries. The surge in virus cases in India has grabbed attention in recent weeks, but infections are on the rise in most parts of the world, especially in emerging economies. India's stock market has also pulled back from record highs reached in February and could stay under pressure while the country tries to get the coronavirus back under control.
Inflation is coming
Indeed the stock market is soaring and bond yields have pulled back after a big spike earlier this year. But make no mistake: Investors still have plenty to fret about when it comes to the threat to inflation.
This growth will likely lead to inflation — and higher interest rates. The only question is when.
Investors freaked out about inflation in March, sending long-term bond rates to their highest point since pre-pandemic levels from January 2020. But the yield on the 10-year Treasury has since cooled off, from a peak of 1.77% on March 30 to about 1.55%.
The threat of inflation is real, and it may not be "transitory" — a word that the Federal Reserve is deploying to try to reassure investors.
I noted that a "massive" spike in the prices of several key commodities such as corn, lumber and cotton, should not be ignored. There will be a trickle-down effect that will take time to see, but it will impact prices for food, housing, clothing and other retail goods.
Disclaimer: This article is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making an investment based on your own personal circumstances.