The S&P 500 continued its steady ascent by adding just over 1% to last week's gains. This comes on the heels of remarks from Federal Open Market Committee (FOMC) Chair Jerome Powell about the path forward for interest rates and a call for the government to go big on stimulus. At the same time, the US appears to be turning the corner on the virus. The rate of new cases has been falling steadily since mid-January as vaccinations pick up. With firm Fed backing, a Congress looking to squeeze in another big stimulus package or two, and reopening in view, markets have little holding them back. The potential for inflation is on everyone's mind, but it simply is not showing up yet in the data.  

Jerome Powell has fielded a number of questions about inflation concerns over the last few weeks. In response, the chairman has remained steadfast in his view that any near-term spike in inflation is likely to be transitory and that the greater concern is fighting the secular forces that have held inflation down for much of the last four decades. To that end, the Fed appears unlikely to begin raising interest rates until we sustain inflation north of 2% for an extended period of time. With the threat of higher interest rates tabled, markets look to be taking it as a free pass. Ultimately, should the market begin to melt-up, it could test the resolve of the Fed.  

Right now, though, it is hard to describe the market as disconnected from fundamentals. Corporate earnings have been remarkably robust. As unbelievable as it sounds, S&P 500 earnings in the 4th quarter of 2020 are running over 6% above 2019's results when the world was mostly Covid free. About a third of companies still need to report, but what we have seen so far is impressive and a reminder of how well companies have performed through this crisis. Earnings of this nature are hardly the hallmark of a 2000s style bubble.  

On Capitol Hill, a third stimulus package is working its way through the reconciliation process and looks to be landing closer to the $1.9 Trillion mark than we thought would be possible. An infrastructure package is also beginning to shape up for later in the year. It is too early to tell whether tax increases are going to be part of the narrative, but right now, the focus remains on the massive amount of stimulus still in the waiting. Consumers and businesses should be in good shape whenever they are able to get back in full gear.  

The key question is whether all of this will prove to be too much and overheat the economy. The Fed has made its stance clear, and we have learned to respect their opinion. Don't fight the Fed is our mantra. Still, we have our eyes out for inflation and are prepared to make changes as necessary.  

Preston May, CBE®
Research Analyst


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