Dow Jones Stock Market Today – Here’s What Wall Street Will Focus on Next Week as Fed Rate Panel Meets
Despite the sharpest economic contraction on record taking place during its second quarter, 2020 saw a massive leap in household wealth, the vast majority of it due to a surge in asset values, largely equities. And that in no small part could be traced to the Federal Reserve’s slashing of interest rates to near zero, its massive infusion of funds into the financial system, and its backstopping of the corporate and municipal credit markets.
According to Fed data released this past week, household wealth last year rose by 10%—5.6% in the fourth quarter alone—to a record $130.2 trillion. Of the $6.9 trillion increase in the latest three months, $6.2 trillion came from gains in asset holdings, according to a J.P. Morgan economics note, which added: “This underscores why the outlook for household finances depends more on the future behavior of asset prices than past behavior of personal saving.”
Yet the Fed’s exertions have had less impact on the real economy. In part, that’s because the wealth effect—the supposed tendency of investors to spend a portion of their winnings—largely has been dead for a decade, the bank’s economists write. Instead, much of the profits have been saved, which they attribute to “the skew of wealth gains toward the ultra-rich.”
In the stock market this past week, the rise of long-term interest rates weighed most heavily on the
which mainly traded counter to moves in 10- and 30-year Treasury yields, owing to the greater impact of higher discount rates on cash flows expected in the distant future. Even so, the Nasdaq broke a three-week losing streak, ending up 3.1%.
Dow Jones Industrial Average
closed Friday at records, with respective weekly advances of 4.1% and 2.6%. What’s unusual is that both the S&P and the 10-year Treasury yields finished at 52-week highs, with the latter ending at 1.62%, writes Doug Ramsey, chief investment officer at the Leuthold Group. Historically, this confluence has suggested tough sledding for stocks. But in all but one instance in the past 25 years, it was followed by a significant drop in bond yields, which often relieved the pressure on stocks.
Fully mindful of the danger of writing these words, we wonder if it might be different this time. The rise in the 10-year Treasury and the S&P 500 both could be reflecting the expectations of stronger growth ahead, especially with the economy getting the dual boosts from vaccinations and the fiscal thrust from the just-signed $1.9 trillion Covid-relief package. Most of the recent rise in bond yields has been in real interest rates, rather than inflation compensation. In the past month, the 10-year Treasury’s yield is up by 0.41 of a percentage point, while 10-year Treasury inflation-protected securities’ real yield is up 0.37, according to Bloomberg data.
As a result, the Federal Open Market Committee will face significantly changed circumstances as it gathers this coming week. It’s certain that the FOMC will make no changes in current policy, instead maintaining its near-zero overnight federal-funds rate target and its current $120 billion monthly securities purchases. So, the market’s attention will be on the panel’s Summary of Economic Projections, which will be updated for the first time since Dec. 16.
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No doubt the Fed’s gross-domestic-product growth projection for 2021 will be lifted significantly from the previous 4.2%. But even more, all eyes will be on the group’s fed-funds rate projections. The December projections summary showed that the FOMC’s median expectation was for fed funds to hold near zero through the end of 2023.
But Christian Scherrmann, U.S. economist at DWS Group, writes that the Eurodollar futures market has priced in no fewer than five quarter-point fed-funds rate hikes in 2024. While that’s still a ways off, the stock market will be sensitive to any sign of higher interest rates in the future.
Write to Randall W. Forsyth at [email protected]
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