Image: Unsplash
Image: Unsplash

Stocks and bonds clash as new US stimulus package and vaccination plans signal reopening of economy

US president Joe Biden signed into law on Thursday 11 March the long-awaited $1.9tn coronavirus stimulus bill and directed states to make all adults eligible for vaccinations by 1 May 2021. All three stock indexes rose for the day, with the S&P 500 climbing 1%, Dow Jones up by 0.6%, and Nasdaq up 2.5% as earlier erratic bond markets calmed and 10-year US Treasury yields remained steady at 1.52%. Tesla shares gained 4.7%, while Amazon and Apple were up over 1.5%. Google’s parent company Alphabet rose over 3%, as did Facebook. Netflix was up 3.7%

The next day however, the ten-year Treasury yield rose past 1.64%, the highest in a year, after investors gained confidence in a strong economic recovery, igniting a bond sell-off and bringing down the tech-heavy Nasdaq by 0.6%. Alphabet dropped 2.4% while Apple and Amazon slid 0.8%. The S&P 500 however was up slightly by 0.1% on Friday while Dow Jones gained 0.9% for the day.

Overall this week, the Nasdaq gained 3%, the S&P 500 rose 2.6%, and Dow Jones surged 4%. In Europe, the region-wide Stoxx 600 fell 0.3 on Friday while the UK’s FTSE 100 rose 0.3%, and Germany’s Xetra Dax dropped 0.5%.

A rise in interest rates has resulted in investors pulling out of high-growth technology stocks

“I think the story is becoming very, very clear in the tech sector. We have incredibly high valuations and yields that have tripled from the low last year,” said Robert Conzo, CEO of The Wealth Alliance, according to CNBC. “You are going to see a lot of volatility in the tech sector. There’s a better trade out there in the cyclicals.”

Treasuries, as they are known, are bonds issued by the US government. The higher the yield percentage on these bonds, the higher the return. According to MarketWatch, a rise in interest rates has resulted in investors pulling out of high-growth technology stocks, which the Nasdaq is filled with, and into value stocks poised to benefit from a reopening of the economy, which the stimulus and vaccines are set to achieve. So rising yields in the US government bond market have recently influenced the kind of stocks investors plough their money into to a significant degree.

But according to Jim Paulsen, Leuthold Group’s chief investment strategist, rising interest rates do not represent a long-term threat to the stock market, as reported by Business Insider. A rise in rates and its impact on the stock market depends on the economic situation, according to Mr Paulsen. Rising interest rates amid a strengthening economy “may prove no challenge at all for stocks,” he said.

Bond markets have been volatile recently over the prospect that a quick US economic recovery would increase inflation

Bond markets have been volatile recently over the prospect that a quick US economic recovery would increase inflation, which decreases the value of interest payments on bonds. Bond yields in the Euro zone were on the rise since February alongside US bonds after Mr Biden announced a big stimulus package. It led to fears that rising yields could derail the economic recovery in Europe by raising borrowing costs for countries already struggling with the coronavirus. But treasury yields relaxed and held steady on Thursday as European Central Bank President Christine Lagarde said that higher market rates were a risk to financing conditions and that the ECB would accelerate bond purchases under its pandemic emergency purchase program. This is one of the reasons stocks went higher on Thursday.

Mr Biden’s much-anticipated relief bill was a big cause of the volatility the next day. The package will send direct payments of up to $1,400 to many Americans and put nearly $20 billion into Covid-19 vaccinations and $350 billion into state and local government relief. It is intended to help struggling people and businesses affected by the pandemic get back on their feet and boost the reopening of the economy.

The stimulus bill and the European Central Bank’s pledge to increase the pace of its bond-buying programme have sent “a wall of money coming like we haven’t seen since the second world war,” according to Didier Rabattu, head of equities at Lombard Odier Investment Management, according to the Financial Times. “The Nasdaq is made of growth companies, it’s a pretty volatile index. In this environment, when rates go up, investors reprice the value of growth.”

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