Overheating-Economy Fears Drag Wall Street Into Lull

Stocks flatlined all week as inflationary concerns began to pick up speed, despite reassurances from the Federal Reserve. 

A worker clears snow from the front of the New York Stock Exchange in the Financial District of Manhattan on Thursday. (AP Photo/John Minchillo)

MANHATTAN (CN) — After logging record gains in all three U.S. indices a week ago, markets remained flat all week as concerns over inflation continue to darken hopes of a recovery.

By the closing bell on Friday, the Dow Jones Industrial Average gained less than 1 point, though the index had managed to add about 50 points on top of last Friday’s record high.

The S&P 500 and Nasdaq were not as lucky. They remained relatively flat most of the week, losing 20 points and 221 points, respectively, for the week.

Friday’s gains masked the incremental losses on Wall Street throughout the week, as inflationary concerns persist. The producer price index gained 1.3% in January, its largest increase since December 2009, according to the Bureau of Labor Statistics.

The agency’s import-export price index, another indicator of inflation, showed a 1.4% gain in import prices, beating consensus expectations and showing the largest one-month increase since early 2012. The index also reflected a 2.5% increase in export prices, way above the 0.7% gain many had predicted.

Still, top economic officials say now is not the time to start worrying about overheating the economy. 

In minutes from the Federal Open Market Committee’s meeting late last month, the central bank projected that inflation is not an immediate concern, either, predicting 2% price growth by the end of 2021 before being projected to “moderately overshoot 2% for some time in the years beyond 2023.”

Other Fed officials have signaled that inflation is nothing something to worry about. “I am not thinking that we have unwanted inflation around the corner,” said Mary Daly, president of the San Francisco Federal Reserve, at a virtual event earlier in the week. “I don’t think that’s a risk we should think about right now.”

Some others say inflation isn’t an immediate concern because spending is still lackadaisical. Anuradha Gaggar, a senior research analyst at Commonwealth Financial Network, wrote that, despite trillions in stimulus dollars, the demand for goods and services remained fairly suppressed in 2020 while savings and equity trades grew. 

Wall Street set a record $120 trillion in trades last year, a 50% increase over the trades made in 2019. “Retail traders now account for one-fifth of stock-trading volume in the U.S., double their share from a decade ago and behind only market makers and high-frequency traders,” Gaggar wrote.

“This scenario was good for our investment portfolios and assets but did not ignite consumer price inflation. No spending means no inflation,” she wrote, noting that inflation will not likely rise until consumer spending rebounds, companies pour money into new equipment and buildings, and certain industries grow. 

Others, though, worry that the recent increase in inflation may be here to stay. “The risk, of course, is what happens if the uptick in inflation isn’t transitory, because if that’s the case the Fed will have to get less dovish, and that’s not priced into stocks,” Tom Essaye of the Sevens Report wrote in an investor’s note. 

“If it does not prove transitory, that’s a problem for this rally, because bond yields will continue to rise, and it will force the Fed to get less dovish regardless of what they’re saying now — and that will be a headwind on stocks,” he wrote.

Investors were also disheartened by the rise in unemployment claims. According to data from the Labor Department, initial claims rose to 861,000 for the week ending February 13, compared with 848,000 claims the prior week. The previous week’s unemployment numbers were revised up from 793,000.

A hiring sign is displayed at a CD One Price Cleaners in Schaumburg, Ill., on Feb. 6, 2021. (AP Photo/Nam Y. Huh)

While a relatively small increase, this marks the first time in five weeks new unemployment claims have increased. Unemployment claims have remained stubbornly high, however, remaining in the 700,000–900,000 range for the past few months.

Still, the uptick could be seasonal. “The latest jobless claims data are consistent with the downbeat message from labor market indicators at the start of the year,” wrote Lydia Boussour, an economist at Oxford Economics. “While downside risks remain, broader vaccine distribution and increased fiscal support should lead to a marked improvement in labor market trends by the spring and summer.”

Fortunately, job postings are gaining despite the rise in unemployment, according to data from Indeed’s Hiring Lab. The company showed job postings as of February 12 were up 3.9% year over year — just prior to the pandemic striking the United States — marking a solid gain above the 2.4% year-over-year increase posted last month.

Another data point showing some positivity is in home building, as the National Association of Home Builders index marked a mild increase to hit 84 so far this month. The increase was brought on by both incredibly high demand for homes and a huge spike in lumber prices.

NAHB Chairman Chuck Fowke said in a statement that record-high lumber prices have driven price increases even as inventories are at all-time lows. A recent survey by the association shows that nearly all association members are most concerned about inconsistent access to building materials, as supply chains are disrupted by the persistent Covid-19 pandemic. 

As for the pandemic, cases have certainly not petered out but fortunately hospitalizations have decreased steadily the last few weeks after hitting a peak in early January. As of the week of February 5, virus patients occupied fewer than 20,000 intensive care unit beds nationwide, down from more than 29,000 beds the week ending January 8.

According to Johns Hopkins University, more than 110 million cases of Covid-19 have been reported worldwide, with more than 2.4 million deaths. In the United States, nearly 28 million Americans have contracted the disease, while about 493,000 have died.

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