Friday's Market Minute: Inflation and Taper Fears Take a Backseat to Bullish Sentiment

The stock market seems to certainly not care about inflation, labor shortages, or supply chain problems. The Fed taper trade has also been truly kicked to the sidelines for now. Earnings are dominating the headlines and market sentiment even as bond yields, energy prices, commodities, and rate hike expectations around the world continue to creep higher. So far, earnings continue to impress as 84% of reported S&P 500 companies have topped expectations.

The U.S. economy is still on solid footing, but inflation pressure remains the biggest threat which continues to dominate the focus of investors. That could continue to keep pushing Treasury yields higher into the remainder of the year. Corporate bond rates expressed by the benchmark five-year Treasury yield recently rose to 1.20%, the highest level since February 2020. The 10-year breakeven inflation rate, derived from U.S. inflation-protected government securities, rose to over 2.6% yesterday, marking the highest level since September 2012. Nonetheless, the S&P closed above the most recent year-to-date high published seven weeks ago on September 2.

High inflation, rising yields, and record equity prices perhaps suggest that investors are growing increasingly skeptical of the Fed’s commitment to combating rising inflation for fear of putting the brakes on the economic recovery. This is especially true with non-core inflation coming from rising commodity prices, which is not the type of inflation that the Fed has historically been willing to adjust monetary policy to counteract. As we continue to move through earnings season, it is likely that large companies with economies of scale will be best suited to manage around supply chain disruptions and have pricing power to earn their way right through this inflationary rough patch. That, in turn, might be enough to support U.S. stock prices at their current record levels, given the lack of attractive alternatives for investors.

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