Interactive Investor

Stock market bounce back explained

Inflation concerns have been put to one side despite unprecedented monetary and fiscal stimulus. Why?

14th May 2021 08:44

Richard Hunter from interactive investor

Inflation concerns have been put to one side despite unprecedented monetary and fiscal stimulus. Why?

In what has been a tough week for markets, some reassuring noises from the Federal Reserve have assuaged some inflationary concerns, although the subject is far from over.

Labour shortages, global supply chain blockages and an oil price squeeze following a cyber attack on a major US operator (the price is up by 29% in the year to date) will keep the pressure on, as the power of the various stimuli takes traction, potentially at a faster rate than the economy can presently cope with.

More broadly, the debate on inflation will rumble on. On the one hand, some argue that ongoing technological innovation will largely make inflation a thing of the past, but the unprecedented monetary and fiscal stimulus currently in force could threaten any such trend.

The release of data in the form of US retail sales later will give further colour to the increasing strength of the US recovery, as fiscal stimulus and a further easing of Covid-19 restrictions improves the mood of a vitally important component of the economy. In what could be a leading indicator, Airbnb (NASDAQ:ABNB) yesterday showed a rebound in its numbers following further lockdown lightening, with a 52% jump in bookings.

The fears of the week have also kept up the pressure on growth stocks, and big tech in particular, where the Nasdaq is currently up by just 1.8% in the year to date. Elsewhere, the main indices have regained some poise, with the Dow Jones ahead by 11.1% and the S&P 500 by 9.5% in the year to date.

The ripples of dwindling sentiment also reached the UK, although the FTSE 100 index pared most of its losses towards the end of the day yesterday and, with a stronger opening this morning, the index remains ahead by 8.5% in the year to date.

Such pressure has enabled increasingly interested international investors to buy on the dips in what is more widely being seen as an undervalued market compared to global peers and indeed historical levels.

The likely growth of the UK economy as the year progresses could also light a fire under the cyclical sectors, which have been volatile of late but which are poised to benefit from a rebound, such as the banks, oils and miners.

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