As we have noted in many of our market commentaries, the economic recovery is broadening dramatically on news of global vaccinations and unprecedented economic stimulus. While good economic data continues to be seemingly limitless, risks to the positive market story continue to rise. With this as a backdrop, stocks opened lower today on concerns around inflation, peak economic growth, potential rising taxes and fallout cryptocurrency selling pressure.
Starting with inflation, investors increasingly fear its impact on both stocks and bonds. Bond investors are demanding higher yields to compensate them for inflation’s effect on purchasing power. This impacts stocks because higher borrowing costs from rising yields make corporate debt more expensive. Couple higher borrowing costs with widespread shortages of components, materials and freight services along with wage growth at 20-year highs, rising inflation is definitely an important market concern. Last year’s unprecedented recession where personal income rose and goods purchases soared have been primary causes of today’s shortages. Rising costs impact profit margins and earnings growth. Since earnings generally drive stock prices, equity valuations, which are currently at levels not seen since the dot-com bubble, also must be adjusted for the rising costs.
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Commentaries are published by Cetera Investment Management LLC, an SEC registered adviser owned by Cetera Financial Group. Cetera Investment Management provides market perspectives, portfolio guidance, model management, and other investment advice to its affiliated broker-dealers, dually registered broker-dealers and registered investment advisers.
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