Dow plummets 682 points on fears overheating inflation will stifle the economic recovery

NYSE Trader
Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., March 5, 2020.

US stocks tumbled into the close with the Dow dropping nearly 700 points as investors feared overheating inflation will stifle the nation’s economic recovery. Key inflation data came in significantly higher than expected Wednesday morning. The consumer price index increased 4.2% year over year in April and 0.8% from the prior month. Economists were expecting a 3.6% year over year gain and 0.2% gain from March figures.

Core inflation – which leaves out volatile energy and food prices – rose 0.9%. That’s the largest monthly increase for the core index since 1982.

The higher-than-expected figure stoked further concerns that the Federal Reserve is misreading the inflation story. The US central bank has signaled that inflationary pressures will only be transitory.

“The fact is that when we factor in all the monetary and fiscal stimulus that’s been delivered (or shortly will be), the Covid crisis seems likely to be a net inflationary event, at least in the near term,” said BlackRock’s Rick Rieder.

The chief investment officer of global fixed income and head of the BlackRock global allocation investment team added: “The risk of overheating in multiple places across the financial and real asset arenas is becoming more and more of a realistic challenge for future policy, as some have suggested, and without an evolution of what heretofore has been policy reacting to emergency economic conditions, the risk from this will only grow.”

Here’s where US indexes stood at the 4:00 p.m. ET close on Wednesday:

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While there is likely more downside ahead for the stock market as it looks to find support near key technical levels, a bullish backdrop remains for equities, according to Bank of America. The 3% sell-off in the S&P 500 over the past week represents a rotational move into cyclical stocks and out of growth stocks rather than a top formation, the bank said in a Tuesday note.

Fundstrat’s Tom Lee is also bullish. In a Wednesday note he said the recent movements of two market fear signals are setting the stock market up for massive gains ahead.

Ether breached a valuation of $500 billion for the first time on Wednesday as the rally for the second-largest cryptocurrency continues. Ethereum’s digital token hit $4,357 at around 6 a.m. ET, according to data from CoinMarketCap – a 53% jump in just 12 days since the beginning of the month.

West Texas Intermediate crude rose as much as 2%, to $66.63 per barrel. Brent crude, oil’s international benchmark, jumped 1.9%, to $69.90 per barrel, at intraday highs.

Gold fell 0.9% to $1,819 per ounce.

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2 sectors will be ‘clear winners’ in the event of a sell-off following Biden’s $1.9 trillion stimulus plan, BofA says

Traders work during the closing bell at the New York Stock Exchange (NYSE) on March 18, 2020 at Wall Street in New York City

The stock market has largely priced in Washington’s $1.9 trillion stimulus plan already and investors should anticipate a “sell the news event” once the bill is passed, according to Bank of America.

A group of strategists led by Savita Subramanian said in a note Friday that cyclical stocks and small caps will be “clear winners” in the event of a stimulus-induced sell-off. 

Cyclical and small caps are highly GDP-sensitive and still trade at a steep discount, said BofA. In comparison, large-cap consumer discretionary and information technology stocks are priced to the downside.

Most of BofA’s indicators suggest that stocks are currently pricing in a lot of good news. For example, the ratio of the S&P 500 market capitalization and the M2 money supply is at its highest point since Feb 2020, and well above the post-financial crisis average as optimistic investors pile their cash into stocks.

According to the strategists, the ratio currently indicates that over $3 trillion in stimulus may already be priced in.

Bank of America also warned that stocks are currently pricing in a 1.4% yield on the 10-yr treasury. If that rate is to move up to 1.75% by the end of 2021, the long-standing “TINA” mantra that proposes “there is no alternative to equities” may be at risk.

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