Friday's Market Minute: A Market Of Conflicting Factors

U.S. stocks are unsteady this week as investors struggle to navigate through a muddied global pandemic outlook, a suite of corporate earnings updates, and yesterday’s news of proposed legislative overhaul of capital gains taxes. The swings that we are seeing reflect the fact that investors are grappling with many conflicting factors.

There are differences over the vaccine rollout and virus caseloads globally, while at the same time the U.S. and E.U. are showing signs the economic recovery is broadly on the recovery side of the road. The Bank of Canada became the first global central bank to indicate language of a balance sheet taper considering solid commodity export growth and the latest U.S. fiscal stimulus making its way via trade and commerce to the north. On the flip side, ECB President Lagarde did little to boost short-term optimism that they were closer to following Canada’s lead in tapering asset purchases.

High levels of government spending everywhere, resilience in global growth, commodity price gains, and an eventual coordinated global reopening are all cyclical tailwinds for equities. However, it seems the turnover in interest rates the past couple weeks may be meaningful in terms of overexuberant expectations for a quick return to economic normalcy.

The dollar appears to have topped in late March, yields are falling, and U.S. bonds are back in defensive favor. The market narrative has shifted from the risk of uncontrollable inflation to resurgent virus transmission and the possibility of an aggressive tax hike on capital returns. If we toss in concerns of stretched stock valuations, Bitcoin taking a bath, and the FOMC meeting next week, one might expect some earned profit-taking and volatile trading in the near term.

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