The S&P 500 closed at a record high on Wednesday after the Federal Reserve unveiled higher growth forecasts and cooled inflation fears.
The growth forecast for the US economy was raised to 6.5% for 2021, which would represent the fastest expansion since 1984. That was up from the previous estimate of 4.2%, which was made at Christmas. The Fed also predicted that the unemployment rate would drop to 4.5% by the end of 2021.
Investors fear inflation, but Fed chairman Jerome Powell was keen to stress that he is supremely relaxed about it. He said there is no need to raise interest rates until at least 2024, and reiterated that there is no need to worry about inflation.
It is expected to increase to 2.4% this year, which is above the Fed’s 2% target, but Powell said it is a temporary surge that will be treated as “transitory”. “We’re committed to our framework,” said Powell.
In a Bloomberg letter, John Authers said: John Authers puts it in his Bloomberg letter: “Powell was telling everyone that the Fed now cares more about unemployment than inflation, and that there’s no need to worry that the likely inflation scare over the next few months, as the great shutdown passes more than 12 months into the past, will shake the [Fed] into tightening monetary policy.”
That initially soothed concerns in the markets, causing the S&P 500 and the Dow Jones to hit new records and the Nasdaq to fight back into positive territory.
However, investor caution gripped the markets once again on Thursday following a spike in bond yields. The 10-year Treasury yield jumped to 1.75%, its highest level since January 2020, causing investors to sell growth stocks.
The Nasdaq dropped 3%, suffering its worst day since February 25, driven by Tesla, Apple, Amazon, Netflix and Alphabet. The Dow Jones set a new intraday high on Thursday, but then ended up falling 0.5%, while the S&P 500 slid 1.5%.
That sell-off alarmed investors around the world. The Shanghai Composite shed 1.7% on Friday, Japan’s Nikkei 225 lost 1.4% and Hong Kong’s Hang Seng Index fell 1.7%, while there were also declines in South Korea, Taiwan, Australia and then Europe.
However, US stocks were poised to rebound on Friday as investors shrugged off that overseas sell-off. Futures for the Dow, S&P 500 and Nasdaq were all up on Friday, as inflation fears abated, but it looks as though there could be more volatility ahead, with yields continuing to spook investors and hitting growth stocks.
Stephen Innes, chief global market strategist for Sydney-based online broker Axi, wrote in a research note on Friday: “The rapid rise in long-end US yields has spooked investors again overnight as there appears to be no lasting respite for the fixed income onslaught.”
The Fed has been clear that the US economy is headed for a healthy reflation, quelling fears that a surge in inflation will undermine growth, but investors are not fully convinced, so more volatility appears to be on the horizon.