Simple rules of supply and demand say that plans by the Biden administration for a $1.9 trillion package of coronavirus stimulus/relief and proposals to spend another $2 trillion on infrastructure should be driving up yields on government bonds (and driving down prices.) Investors want more reward–higher yields–in return for buying more Treasuries and taking on the risk that all this supply will push Treasury prices lower. But the bond market is hardly ever as simple as it looks and there are other trends at work that you ought to figure into your investment calculations.
Last week, while the major indexes were putting in another set of record highs, investors poured a record $58 billion into stock funds, according to EPFR data collated by the Bank of America and reported Friday in the Financial Times. U.S. equities got the lion’s share of the money with net inflows of $36.3 billion. The biggest sector destination for all that cash was the technology sector which saw net inflows for the week reach an all-time high of $5.4 billion.
Wall Street analysts have increased their 2021 forecast for S&P 500 earnings by 3.6% to $170.3 a share in January. That’s the biggest jump in earnings estimates in January for any year dating back to 2013 except the revisions in 2018 on the heels of the December 2017 tax cuts. Of course, a good part of this higher estimate is already figured into stock prices.
Even before the GameStop (GME)/Robinhood explosion of last week, Democrats in Congress and the White House were targeting the financial sector for investigations, for tighter enforcement of existing regulation that had been relaxed during the Trump administration, and for new regulations that would address the non-bank sector.
The events of last week when Robinhood and other brokerage services halted trading in shares of GameStop, AMC (AMC) and other heavily shorted stocks that had turned into stock market rockets have just added more energy to those efforts. There’s almost certainly enough energy to go around in the committees now controlled by Democrats to push increased regulation of traditional banks and new non-bank financial institutions. But I expect that the trading halt at Robinhood, etc. will put added attention on FinTech companies.
What might Congress look at?
Public health consequences aside, for the moment, as dire as they are, investors have to wonder if all the bad news on the coronavirus vaccination effort has started to erode the positive vaccine consensus that helped underpin the rally at the end of 2020 and into 2021.
Shares of Alibaba (BABA) and Tencent Holdings (TCEHY) jumped today, January 8, as the U.S. Treasury Department left Alibaba and Tencent Holdings off a blacklist prohibiting Americans from investing in Chinese companies.
On Friday American Airlines (AAL) said it it seeing a slowdown in demand because of surging coronavirus cases. (Again.) And that the company now has a weaker outlook on airline bookings heading into the year-end holidays. The news from American Airlines echoes a similar warning the day before from Delta Air Lines (DAL)
On Thursday night, Treasury Secretary Steven Mnuchin sent a letter to Federal Reserve chair Jerome Powell announcing that he was not going to extend beyond December 31 the emergency lending support that the Federal Reserve using as a backstop in its programs to stabilize the bond market. In March, Congress ha earmarked $454 billion to support Fed lending programs as part of that months coronavirus package. The Fed, ever reluctant to take losses onto its own balance sheet, had used the Treasury cash to stand behind loan programs for medium size businessses and municipalities. Much of that money earmarked by Congress has never actually been extended to the Fed, but the Treasury did earmark $195 billion for specific loan programs at the Fed. It’s that money that Mnuchin now says will no longer be available to the Fed after December 31.