Low interest rates and almost nonexistent inflation have been encouraging investors to keep piling into stocks, even though their prices are rising faster than their profits. But longer-term interest rates have begun to pull higher with expectations for more borrowing by the US government, economic growth and possibly inflation in the future. The yield on the 10-year Treasury has climbed to 1.14 per cent, for example. That’s up from 1.12 per cent late on Monday and from less than 0.90 per cent at the start of the year.
“I wonder whether as the economy reopens and consumer confidence comes back does that further push rates up and challenge the justification of these values,” said Andrew Slimmon, portfolio manager at Morgan Stanley Investment Management.
Besides driving investors away from pricey stocks, higher interest rates can also make borrowing more expensive and hit the housing and other industries particularly hard. That could mean additional pressure on the Federal Reserve, which has been trying to keep interest rates low to jolt the economy out of its pandemic-caused weakness.
The Fed has held short-term interest rates at a record low of nearly zero and bought all kinds of bonds in its drive to help the economy. Its next policy meeting on interest rates is in two weeks.
And despite all the hopes for the future, the present remains bleak. The pandemic is accelerating around the world, particularly as new and potentially more contagious variants of the coronavirus spread. That helped force US employers to cut more jobs than they added in December, the first month that’s happened since the economy was collapsing during the spring.
Energy stocks made broad gains as crude oil prices advanced. Occidental Petroleum climbed 11.8 per cent for one of the biggest gains in the index, while Marathon Oil rose 7.6 per cent.
General Motors jumped 6.8 per cent amid excitement about a business unit it’s creating to sell electric-powered delivery vehicles and equipment.
Stocks of smaller companies were also rallying, with the Russell 2000 index of small-caps up 1.5 per cent and on track for an all-time high. They’ve been leading the market in recent weeks as investors see them benefiting much more from a healthier economy than behemoth stocks that managed to largely sustain themselves through the pandemic.
“You’re starting to see value stocks and financials putting in a consistent outperformance versus growth stocks,” Slimmon said. “But, as rates move higher that thesis becomes more challenged.”
On the losing end were several of those Big Tech stocks that cruised as work-from-home and other trends beneficial to them boosted their profits. Microsoft slipped 1.1 per cent, Facebook fell 1.9 per cent and Google’s parent company Alphabet dipped 1.2 per cent.
Profits will be in focus on Wall Street in upcoming weeks as companies report how much they made during the last three months of 2020. Banks are among the first to report, with several scheduled for Friday. Across the S&P 500, analysts are forecasting a sharp drop in earnings of nearly 9 per cent from a year earlier.
Also hanging over the market will be political uncertainty. Democrats are pushing for the removal of President Donald Trump after his words incited a mob of loyalists to storm the US Capitol last week. The FBI is also warning of plans for armed protests across the country in the days leading up to President-elect Joe Biden’s inauguration next week.
Investors for the most part have been looking past such acrimony and violence, though. They’ve chosen to focus instead on the economic recovery they see as on the way.
In Europe, stock markets were modestly lower. The French CAC 40 slipped 0.2 per cent, and the German DAX fell 0.1 per cent. The FTSE 100 in London lost 0.7 per cent.
In Asia, markets were mixed. Stocks in Shanghai jumped 2.2 per cent, and Hong Kong’s Hang Seng rallied 1.3 per cent. But South Korea’s Kospi fell 0.7 per cent, and Japan’s Nikkei 225 inched up by 0.1 per cent.
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