Markets Record New Highs as Inflation and Unemployment Concerns Mount

Wall Street took a breather from last week’s massive rally but not so much that it still didn’t manage to eke out some record gains. 

A senior receives a Covid-19 vaccine from a healthcare worker after arriving on a bus to a vaccination site at Anquan Boldin Stadium in Pahokee, Fla., on Feb. 3. (Greg Lovett/The Palm Beach Post via AP)

MANHATTAN (CN) — Even with unemployment and inflation concerns beginning to coalesce, markets managed to set new record highs while still slowing down this week.

The Dow Jones Industrial Average had gained 289 points at midweek and settled up 310 points by Friday’s closing bell. The Dow now sits at 31,458 points, a fresh record.

“Ten years ago, a 300+ point Dow Jones Industrial Average trading range would be a 3% move,” James Vogt at Tower Bridge Advisors wrote. “After this massive bull run, it is less than a 1% intraday move now.”

The other indices had similarly low-key, yet record-breaking, weeks. On Tuesday, the Nasdaq broke the 14,000-point mark for the first time ever, gaining a few additional points to finish the week at 14,095 points. The S&P 500 also set a new high point of 3,934 points on Friday as it closes in on 4,000 points.

Despite the lingering positivity on Wall Street, concerns remain about unemployment and inflation.

Unemployment claims once again dipped, though only slightly. According to the Labor Department, more than 793,000 new claims were filed for the week ending February 6, compared with 812,000 the previous week. The prior week’s number originally came in at 779,000 new claims, but the agency revised those numbers upward by 33,000 claims. 

New claims have remained stubbornly high at about 700,000 to 900,000 new claims weekly for the past several weeks and have consistently come in higher than analyst expectations. 

Last week marks the 47th straight week of initial unemployment claims totaling more than the worst week of the Great Recession, a fact that Heidi Shierholz, senior economist at the Economic Policy Institute, says makes a strong case for further stimulus.

On Thursday night, the House Ways and Means Committee approved $900 billion in additional benefits, including $1,400 checks to beleaguered Americans. The move paves the way for the House to approve the total package sometime by the end of February as planned, just in time to extend unemployment benefits before they run out again. 

Shierholz noted that the 11-week extension to new federal pandemic-related unemployment programs that were passed in December “just kick down the road” since they expire soon. “Congress must pass further extensions before mid-March, or millions will exhaust benefits at that time, when the virus is still rampant and the labor market is still week,” she wrote.

Some analysts also see the stimulus as a way to boost equity markets. Vogt suggests Biden should use the legislation as a way to grant incentives to technology companies so they can build more factories in the United States, even if those companies are far from the neediest.

“From an economic perspective, this makes great long-term sense,” he wrote. “Over the years, too much stimulus has been earmarked for short-term projects that fizzle out. Building factories in a growing industry will produce many long-term jobs and have a multiplier effect.”

Other experts say inflation could rise as a result of the stimulus, and thus the total dollar amount must be kept low. James Knightley, chief international economist at ING, notes that inflation has risen to 1.4% since last May and could rise above 3% — even as high as 4% — in coming months.

“If price levels stay unchanged for the next four months the comparison with the depressed price levels of that heavily stressed March-May period means headline inflation is going to rise to 2.8% year over year,” Knightley wrote, noting increasing housing rent could beef up that number significantly. “That is the bear minimum annual inflation will get to.”

Gregory Daco, chief U.S. economist at Oxford Economics, meanwhile dismissed inflation concerns. “First, while greater economic growth will lead to the longest inflation stretch above 2% since before the financial crisis, inflation is unlikely to sustainably breach 3%,” he wrote.

“Second,” he continued, “while the U.S. economy will recoup its pre-Covid size in Q2 and real GDP could surpass potential output in [the second half of this year], we expect several sectors to remain well below their potential for the foreseeable futures.”

During a speech earlier in the week before the Economic Club of New York, Fed Chair Jerome Powell said the unemployment situation is nowhere near returning to pre-pandemic levels. “At present, we are a long way from such a labor market,” he said.

Powell also noted that while the U.S. economy saw the largest 12-month decline in labor force participation since 1948, unemployment data also have “dramatically understated the deterioration in the labor market.” Nearly 5 million Americans were prevented from looking for work last month, Powell noted.

“Correcting this misclassification and counting those who have left the labor force since last February as unemployed would boost the unemployment rate to close to 10% in January,” the chair said.

Noting that the next year will still feel the effects of the pandemic, Powell assured that the Fed is trying to prepare for any contingency.

On Friday, the central bank released its next round of hypothetical scenarios for 32 of the largest banks, finding that in 2021 a major hit to the commercial real estate and corporate debt markets are the biggest worry.

In the Fed’s baseline scenario, real gross domestic product growth averages 4% annually before dropping to 2.5% at the end of next year. Commercial real estate prices are expected to fall 4% in this scenario, then rise 5% through 2022 and another 4% in 2023.

But in the central bank’s worst-case scenario, corporate and real estate lending markets would “deteriorate markedly” while the spread on the yields of investment-grade corporate bonds and 10-year Treasury bonds widens to 5.75% by the third quarter of 2021.

Worse, under that scenario, equity prices would fall 55% through the third quarter as volatility increases and real GDP would all 4% by the end of the year.

During stress tests last summer, the Fed predicted most large banks would be able to weather any economic storm in 2020. The central bank also suggested, however, that banks tighten their belts as well as prohibit share buybacks in the third quarter and curb dividends.

One data point that is trending in the right direction is, for once, the Covid-19 pandemic. While cases of Covid-19 are still distressingly high, the spike in cases has subsided in recent weeks. Worldwide, the total number of new reported cases has dwindled from 250,000 daily last month to about 100,000.

“The good news is that the US Covid numbers overnight continue to show cases, hospitalizations and deaths falling fast,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, tweeted on Friday. The bad news, he noted, is that cases of the U.K. variant B117 are on the rise.

“To be clear, B117 will be beaten by vaccination in due course,” Shepherdson wrote. “But it could delay the final quashing of Covid in the US by a few months. Markets aren’t priced for that.”

According to Johns Hopkins University, more than 107 million cases of Covid-19 have been reported worldwide, with more than 2.3 million deaths. In the United States, 27 million Americans have contracted the disease, while about 475,000 have died.

Many economists hope those numbers will drop even further as the vaccine rollout takes hold later this year. During a speech on Thursday, President Biden said he wants 300 million Americans vaccinated by the end of July. The administration just inked two deals with Pfizer and Moderna to provide an additional 100 million doses of their vaccines.

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