Secondly, the bond market tends to be a good predictor for the economy. The steady rise in yields means investors see the economy getting better but it also suggests they’re concerned about inflation. President Joe Biden’s plan to spend $1.9 trillion on stimulus could be somewhat inflationary, although in a recession, that is not necessarily a bad thing.
Optimism that rollouts of coronavirus vaccines will set the stage for stronger economic growth in the second half of this year has been pushing the stock market higher. But expectations of a post-pandemic recovery also have resurrected concerns over inflation that could prompt governments and central banks to pull back on stimulus down the road in several months or even a year.
The momentum of the stock market, particularly on Thursday, danced closely with the bond market. When bond yields tipped lower in the afternoon, the stock market recovered more than half of its losses from earlier in the day.
“No argument in the market is more important (right now) and more balanced than whether or not we are due for a large spike in inflation,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, in a note to clients.
Energy prices are part of that inflation picture as well. While both natural gas and crude oil prices were down Thursday, energy prices are at levels not seen since before the pandemic. Benchmark U.S. crude oil closed above $60 a barrel, its highest level in a year.
A sign of how painful the U.S. economy remains for many Americans, and the argument for why additional stimulus is needed, came in this week’s jobless claims report. The government reported that applications for jobless benefits rose last week to 861,000. That’s the latest indication that layoffs remain high as coronavirus shutdowns keep many businesses closed.
Minutes from the Federal Reserve’s January policy meeting released Wednesday showed central bank officials believed the pandemic still poses considerable risks to the economy and still support keeping interest rates low in order to boost the economy and help millions of Americans regain lost jobs.
Fed Chairman Jerome Powell has cautioned that inflation could accelerate for a time in coming months as the country opens up. But he and many private economists believe this will be only a temporary rise and not a sign that inflation is getting out of control.
Shares of Dow component Walmart lost 6.5% after reporting weaker results than analysts were expecting.
Shares of GameStop fell 11.4% on Thursday. Congress is conducting a hearing on the recent volatility of these companies, which have been in a tug-of-war between Wall Street institutional investors betting against the companies and the online retail investors who pushed shares higher.