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How Stocks Perform in a President’s First Year

How Stocks Perform in a President’s First Year

January 28, 2021
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It has been a busy past 12 months for the Federal Reserve (Fed), after the onset of the global pandemic prompted historic stimulus from monetary policymakers. With the economy showing signs of being in the early stages of expansion, some have speculated that the Fed may begin to slow the pace of its asset purchases.  Recent comments from some Federal Open Market Committee (FOMC) members that have hinted that the Fed’s bond buying program could be reduced by the end of the year, has signaled that other policymakers may be thinking that way, too.

Adding fuel to the speculation, the 10-year Treasury yield has been climbing, breaking above 1% for the first time since March 2020 as the economy has expanded. Meanwhile, as shown in the LPL Chart of the Day, breakeven inflation rates—the yield difference between Treasury Inflation-Protected Securities (TIPS) and nominal Treasuries—have risen to levels not seen since 2018, suggesting that inflation expectations are heating up, although levels still remain largely benign.

View enlarged chart.

In his press conference following this week’s FOMC meeting, Fed Chair Jerome Powell quickly laid those concerns to rest, hammering home the idea that it is far too early for the Fed to consider tapering its asset purchases until “substantial further progress” is made toward its dual mandate of maximum employment and price stability—with emphasis on maximum employment.

“The Fed has made it clear to market participants that its prior statement of ‘not even thinking about thinking about raising rates’ wasn’t just a quip—they really meant it,” added LPL Chief Market Strategist Ryan Detrick. “There’s still a great deal of uncertainty about the economy going forward, and the Fed has reiterated their support until the last drop of uncertainty has dried up.”

Further, the Fed stated that it is aiming to achieve inflation that remains moderately above 2% for some time, as inflation has been persistently below their target. This view reflects the Fed’s shift to average-inflation targeting as part of their policy framework update introduced at their August meeting. With this updated approach to inflation in place, the Fed looks poised to stomach any near-term inflation scares in an almost “prove it” mentality for steady inflation at or above their 2% target.

The meeting was largely what we expected from the Fed, but their stern dovishness is notable. With monetary policy staying put going forward, fiscal stimulus is back in the driver seat of providing an additional boost to the economy, and we will continue to monitor the progress of President Biden’s recent stimulus proposal.

 

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