Business & Investment

Is there a surge in the stock market coming soon?

The global bond market has been twisted in recent weeks – and during the second week of March, that twist turned into a rout.

In just two trading sessions, the popular benchmark US 10-year Treasury yield jumped from 1.48% to 1.62%. Here in the UK, 10-year bonds have also skyrocketed.

And when the yield goes up, keep in mind that it means that the prices of bonds and gold are going down: bond sales are in progress.

Inflation ahead?

It’s not difficult to understand why it’s sold out.

Fixed income investments (bonds and gilts), as the name implies, offer fixed income. Compared to shareholder dividends, it is a more stable, more resilient and more predictable income, but fixed. The price you pay for a bond or gold leaf at the time of purchase determines the profit you earn.

And that fixed return means that the period of inflation can rapidly erode the actual post-inflationary income of holding bonds and gilts, making it unattractive to investors. This is the driving force for selling out. Concerns about significantly higher levels of inflation.

Rinse with cash

Both bond and equity markets have, in fact, been twisting about inflation since December. Again, it’s not hard to understand why.

Let’s start with the household cash balance. The Covid-19 pandemic has had very different results for many.

Yes, the media is full of stories of people who have been temporarily dismissed, and small business owners can’t open for business – think of stores, pubs, restaurants, and more. However, many others are aware that they continue to work and have accumulated considerable cash reserves with few opportunities to spend their money.

Here in the UK, household cash balances surged in 2020, with an additional £ 21 billion in December. This is due to a significant amount of debt repayment, as well as a £ 16.6 billion reduction in household net debt, much of which is due to outstanding credit card and mortgage balances.

The story is similar in the United States. In December, US household wealth reached a record $ 123.5 trillion, credit card debt fell sharply, and by 2020 it fell by $ 149 billion.

In other words, shops, pubs, restaurants Do Eventually it will resume, and holiday reservations and visits to car showrooms will be possible again, and you will find that so many people spend so much cash.

Does it sound like inflation to you? It will be me.

Money tsunami

Now, in addition to all that cash, let’s put in economic stimulus measures initiated by governments around the world.

Here in the UK, the latest Covid-19 support measures announced by Prime Minister Rishi Sunak in the spring budget have boosted the expected level of government borrowing in 2021 to £ 355 billion. This is an unprecedented level in peacetime. Full payments, self-employed support, cash payments to stores and hospitality businesses, holidays at various business rates, low VAT rates for hospitality businesses: the prime minister’s tycoon seems to know no limits.

In the United States, President Biden’s $ 1.9 trillion stimulus is just as generous. Europe is also participating in the move. Governments everywhere are spending to kickstart a pandemic and devastated economy.

Simply put, it’s all a huge tsunami that goes straight to the economy of the country in question.

And does the huge tsunami of money sound inflation to you? It will be me.

So what does this mean?

Some things.

First, we expect bond and gold yields to rise even higher if inflation actually rises sharply. In other words, selling continues until the yield again provides a realistic post-inflationary return.

And if it persists, the sale of that bond will see a lot of money in need of a home. I don’t know about you, but I think this is good news for stock prices. Moreover, unlike fixed income assets, equities offer a return with some degree of inflation protection, making them even more attractive.

In addition, the inflationary environment helps make growth-centric equities relatively unattractive compared to income-centric equities. This is the same as the valuations of some major tech stocks are currently declining.

All this obvious beneficiary? High-yielding, boring, defensive consumer-oriented stocks – just as your customers are full of cash, they drive stock prices up even further.

The message is clear. It will be an interesting summer for investors.

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Is there a surge in the stock market coming soon? Is there a surge in the stock market coming soon?

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