Dow rallies 308 points as traders digest blowout jobs report and rising yields

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


US stocks rebounded after a sharp sell-off Thursday with the Dow gaining over 300 points following a blowout jobs report while yields rose.

Businesses added 379,000 payrolls in February, the Bureau of Labor Statistics announced Friday. Economists surveyed by Bloomberg expected a gain of 200,000 payrolls. The US unemployment rate fell to 6.2% from 6.3%, according to the government report. Economists expected the rate to drop to stay steady at 6.3%.

The 10-year Treasury yield extended its surge to top 1.61%. 

“The better-than-expected jobs report suggests a healthy economic rebound in progress and will likely add upward pressure on bond yields, as the bond market prices in a stronger economy, which may result in more consumer spending and eventually more inflation,” said James McDonald, Hercules Investments CEO and CIO.

“The biggest risk to the stock market is if the Federal Reserve loses control of bond yields, which have experienced a meteoric rise over the past month. Inflation will continue to exert upward pressure on yields going forward and into the summer months,” McDonald added.

On Thursday, Federal Reserve Chairman Jerome Powell gave little indication that the world’s most powerful central bank was willing to intervene in the recent government bond sell-off.

“I’d be concerned by disorderly conditions in markets, or by a persistent tightening in financial conditions,” he told the Wall Street Journal jobs summit. He said the Fed was keeping an eye on “a broad range of financial conditions,” not just one indicator. Investors took Powell’s words to mean that the Fed was fine with yields rising further. 

Here’s where US indexes stood after the 9:30 a.m. ET open on Friday:

Chamath Palihapitiya cashed out his entire stake in Virgin Galactic for $211 million. The billionaire still indirectly owns 15.8 million shares in Richard Branson’s startup.

Bitcoin is struggling to break past the $50,000 level and hovered below $48,000 Friday morning.

Oil prices rose sharply overnight after the OPEC group of oil producers and its allies unexpectedly agreed to continue limiting supply. West Texas Intermediate crude jumped as much as 2.9%, to $65.66 per barrel. Brent crude, oil’s international benchmark, rose by 3.04%, to $68.78 per barrel.

Gold jumped 0.16%, to $1,703.50 per ounce. 

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Legendary investor Jeremy Grantham says Biden’s $1.9 trillion stimulus plan will make the stock market bubble even worse

Jeremy Grantham

Legendary investor Jeremy Grantham warned investors during a Bloomberg interview that the $1.9 trillion in federal aid President Joe Biden is seeking from Congress will further inflate the stock market bubble.

The GMO co-founder told Erik Schatzker that he has “no doubt” some of the stimulus aid will end up in the market. He said the “sad truth” about the last stimulus bill passed in 2020 was that it didn’t increase capital spending and didn’t increase real production, but it certainly flowed into stocks. 

The plan that Biden is proposing contains a $1,400 boost to stimulus checks, robust state and local aid, and vaccine-distribution funds. Grantham said that if the package passed is worth $1.9 trillion, it could lead to the dangerous end of the bubble.  

“If it’s as big as they talk about, this would be a very good making of a top for the market, just of the kind that the history books would enjoy,” said Grantham.

“We will have a few weeks of extra money and a few weeks of putting your last, desperate chips into the game, and then an even more spectacular bust,” he added. 

Read more: A notorious market bear who called the dot-com bubble says he sees ‘fresh deterioration’ in the market indicator that first signaled the 1929 and 1987 crashes – and warns that stocks are ripe for a 70% drop

Grantham has long-warned of the ballooning bubble he sees in the US stock market. In his investor outlook letter in the beginning of January, he detailed how extreme overvaluations, explosive price increases, frenzied issuance, and “hysterically speculative investor behavior” all demonstrate that the stock market is in a bubble that not even the Fed can stop from bursting.

“When you have reached this level of obvious super-enthusiasm, the bubble has always, without exception, broken in the next few months, not a few years,” Grantham told Bloomberg.

Grantham also said that the combination of fiscal stimulus and emergency Fed programs that helped inflate the bubble could increase inflation.

“If you think you live in a world where output doesn’t matter and you can just create paper, sooner or later you’re going to do the impossible, and that is bring back inflation,” Grantham said. “Interest rates are paper. Credit is paper. Real life is factories and workers and output, and we are not looking at increased output.”

He told investors to seek out stocks outside of US markets, as many other countries haven’t seen the huge bull market the US has. He called emerging markets stocks “handsomely priced.”

“You will not make a handsome 10- or 20-year return from U.S. growth stocks,” said Grantham. “If you could do emerging, low-growth and green, you might get the jackpot.”

Read more: GOLDMAN SACHS: These 22 stocks still haven’t recovered to pre-pandemic levels – and are set to explode amid higher earnings in 2021 as the economy recovers

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Stocks are in a ‘rational bubble’ as long as investors remain confident in continued Fed support, economist Mohamed El-Erian says

Mohamed El-Erian
  • Mohamed El-Erian told CNBC stocks are in a “rational bubble” and asset prices will continue to rise as long as the Federal Reserve signals to investors that it will continue to support the markets. 
  • “It’s rational because the Fed and the ECB keep on signaling that they will continue to inject massive liquidity, and as long as the market is confident that that’s the case, it will drive prices higher,” the Allianz chief economic adviser said. 
  • El-Erian said that the US will continue to see a contrast between what the market is doing and what the broader economy is indicating because of the liquidity in the market.
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Mohamed El-Erian told CNBC on Wednesday stocks are in a “rational bubble” at the moment and asset prices will continue to rise as long as the Federal Reserve signals to investors that it will continue to provide support for the markets.

“This is not an irrational bubble. This is a rational bubble,” the Allianz chief economic adviser said. “It’s rational because the Fed and the ECB keep on signaling that they will continue to inject massive liquidity, and as long as the market is confident that that’s the case, it will drive prices higher.”

Typically, a stock market bubble is created when asset prices surge to levels that greatly exceed the their intrinsic value. Legendary investor Jeremy Grantham said on Tuesday that the stock market is in a  “fully-fledged epic bubble,” driven by extreme overvaluations, explosive price increases, frenzied issuance, and “hysterically speculative investor behavior.” 

For El-Erian, there is a rational reason why stock prices keep going up, and it’s investor confidence in support from the Federal Reserve.

Read more:Deutsche Bank says buy these 14 beaten-down financial stocks poised for a bullish recovery from 2020’s ‘savage sell-off’ – including one that could rally 30%

Stock prices ballooned in 2020: the S&P 500 gaining 16%, while the tech-heavy Nasdaq soared 43%. El-Erian said there’s so much liquidity “sloshing around the system,” that stock prices will continue to move higher this year.

The result is that stock prices continue to rise despite political and economic turmoil outside of Wall Street.  On Wednesday as protesters stormed the US Capitol building, the stock market remained unbothered. The Dow Jones closed at a record high, while the S&P 500 closed up 0.5%. 

El-Erian said that the US will continue to see a contrast between what the market is doing and what “conditions on the ground” are saying because of the liquidity in the market.

Also on Wednesday, the ADP monthly employment report revealed that the US lost 123,000 private payrolls in December. The reading marks the first contraction in nationwide hiring since April. El-Erian said that the report was a “big miss” and demonstrates the “power of liquidity.” 

 

 

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