1. Stocks Slump
Ever heard the saying “what goes up must come down”? This past week, the meteoric rise of tech stocks and speculative stocks was halted. As we wrote in past issues of this newsletter, it’s not a good idea thinking stocks will always go up. The NASDAQ fell around 3.8% this week, led by losses in big tech companies like Apple and Tesla. The Dow Jones fell 1.78% and the S&P 500 fell 2.45%. The unpredictable gains of Bitcoin also came down this week, as the price of the coin fell nearly 20%, to the dismay of many traders. Bitcoin is still up about 35% for the month of February. Overall, investors in the hottest stocks or assets didn’t fare very well in this last week.
The why behind this drop is relatively simple. The belief of many investors is that rise in Treasury yields will lead to a market selloff. Generally speaking, the higher the yield that Treasuries, or US government bonds, offer, the more likely people are to invest their money into these bonds, which provide a guaranteed return on interest, unlike the uncertainty of stocks. If more people are buying bonds, then there are less people buying stocks, leading to an eventual downturn. Some analysts believe that this sell-off is temporary, and is just representative of traders selling their speculative stocks (Bitcoin, Tesla, Reddit stocks) for a profit. However, the future of the market is still uncertain.
2. COVID-19 Update
The FDA recently approved Johnson and Johnson’s new vaccine, creating a new vaccine option alongside Pfizer and Moderna. Overall, the total cases in the US totals over 28 million, with Southern states being disproportionately overrepresented. In states with the highest percentage of at-risk patients, such as Florida and Texas, the virus has yet to be contained. If you are a high-school student reading this article, be prepared to have the option to receive the vaccine. Pfizer and Moderna are both testing their vaccines on children ranging from ages 12-17.
3. Inflation Fears
Treasury yields, the enemy of a red-hot stock market, are back on the rise. For the past decade, the yields of Treasury bonds have been extremely low. This makes the stock market’s potential returns look very attractive to everyday investors like you and me. However, as expected inflation increases and the economy’s strength decreases, due partly to the pandemic, the yields on Treasuries rise. The actual prices of the bonds are decreasing due to more being sold off, which in turn increases their yield.
But why is expected inflation rising? The answer: the pent-up demand of the economy. With Congress providing another $1.9 trillion, a spike in buying is expected when the effects of COVID dissipate. This spike will likely boost in the economy, leading to inflation.
Companies serve to gain and lose from this rise in interest rates. On one hand, all of the “hype” companies referred to on WallStreetBets, as well as overly-speculative companies like Tesla and most Big Tech will be hit hard. These companies’ share prices are determined on how well investors think they will do in the future, so if inflation and Treasury rates increase, then borrowing rates increase and upcoming profit will decrease. On the other side of the equation, banks that offer loans and mortgages serve to gain more profit as interest rates rise. In the short-term, this might be true, but in the long-term, if consumer spending decreases, banks will also be negatively impacted. Finally, commodity-based companies such as silver, oil, and energy companies also serve to gain as their commodities price will increase.