S&P500 Ends at Record | ThorFX

11 Jun 2021 · 3rd Party Analysis

Higher Inflation Doesn’t Spook Markets, S&P500 Ends at Record

WRITTEN BY ThorFX

In Summary

  • CPI report for May showed living cost jumped 5% on an annual basis
  • S&P500 rallied to an all-time high prompted by increased demand from investors

The biggest worry on investors’ minds for quite some time has been inflation. The financial markets have gone through wild swings in either direction as participants are trying to position their portfolios in a way that could accommodate higher prices and even the prospect of rising interest rates.

The prospect of rising prices, in the US in particular, has had investors worried over what the Federal Reserve might do and that, as result, has caused a lot of turbulence inequities. Main stock indexes this year have fluctuated swayed by the lingering uncertainty of whether the US economy will continue its ascend despite the threat of a sharp rise in prices.

In April, inflation in the US sped up as consumer prices leapt 4.2%, the fastest rate since 2008. The high reading knocked the stock gauges off their highs as investors feared that the lofty valuations of stocks would be jeopardized. Tech shares suffered the most, but only for a while before the market was back on its feet and ready to march higher. Yesterday, May’s inflation report was released. Once again, data showed a sharp rise in prices. The cost of living surged 5.0% in May over the last 12 months, the highest increase in nearly 13 years. Against the backdrop of a spike in prices, however, the stock market this time was not impressed at all.

The Bond Market Remains a Key Indicator

The non-reaction in equities was partly because the interest rate remains ultra-low so companies can borrow for less than the rate of inflation. In other words, businesses sell products for 5% more while borrowing money at less than that to fund their operations and grow. Depending on the sector, some companies might need to pay more, but generally, the market could easily discard higher CPI reading unless it is accompanied by rising interest rates.

More importantly, the key barometer used to measure the balance in the US financial markets is the bond market. Yields on the Treasury bonds yesterday barely moved when the CPI data was released. The steady float in yields reassured investors that the big scare is most likely behind and that inflation could indeed be transitory, as the Federal Reserve has stated.

In March, the 10-year Treasury yield soared to more than 1.7%, up from 0.9% in January, prompting investors to retreat from high-flying stocks and focus on economically sensitive companies. Investors then expected inflation could stick around for a long time and eat into their portfolios.

Now, the market’s fears have been assuaged by stable Treasury bond yields and participants largely consider the current inflation will fade without causing any major disturbances. The 10-year Treasury yield has fallen back below 1.5%. Yesterday, the yield on the benchmark note closed at 1.489%, its lowest level in more than three months.

Investors piled into stocks across the board and prompted a record close for the broad-based S&P500. The Dow Jones Industrial Average climbed moderately by 0.06%, or 19.10 points, to finish the session at

34,466.24. The Nasdaq Composite advanced 0.78%, or 108.58 points, to 14,020.33. The S&P500 jumped 0.47%, or 19.63 points, closing at a record high of 4,239.18.

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