Dan Niles, founder and senior portfolio manager for the Satori Fund, told “Mornings with Maria” on Tuesday that markets will “potentially get to a new high” in the short term driven by all the new stimulus, but “inflation going up is going to become a big problem” by mid-2021.
On Tuesday, U.S. equity markets battled higher as bond yields eased off their highest level in over a year. The rally comes a day after the Nasdaq slid into a correction, down at least 10% from its recent peak, as the 10-year yield climbed to a 13-month high of 1.59% after the Senate passed President Biden’s $1.9 trillion COVID-19 relief package.
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In a 50-49 vote, the Senate passed its own version of Biden’s $1.9 trillion bill, which limits $1,400 checks to those making $75,000 a year or less, among other things. The U.S. House of Representatives will vote on the measure as early as Tuesday.
The bill’s passage through the upper chamber reignited worries of inflation, sending the 10-year Treasury yield briefly above 1.60% before pulling back. The recent rise in the 10-year yield has rattled investors as it reached higher than the S&P 500’s 1.5% dividend yield.
On Tuesday, mega-cap technology names that have been mauled amid the recent rise in bond yields were bouncing back with Tesla Inc., Apple Inc. and Netflix Inc. outperforming as the benchmark yield was trading lower by 5 bps at 1.54%, falling below where it closed on Friday.
“In the near-term, you got the 1.9 trillion COVID relief plan that will probably pass in the next 48 hours. On top of that, you have another three trillion in stimulus for infrastructure coming this summer and the Fed keeps buying about 120 billion in bonds a month so you add those three things together, that’s another 30% of GDP (Gross domestic product) in stimulus coming into the market,” Niles told host Maria Bartiromo.
He then noted that “money supply is already up 26% year-over-year before that stuff hits so it wouldn’t surprise us in the short term to see the market potentially get to new high just driven by all that stimulus, like it’s been done for the last 13 years ever since the global financial crisis.”
“But we think inflation going up is going to become a big problem and we think by sort of mid-year that’s it,” he continued. “And as rates get above 2% on the 10-year, the Fed starts to talk about maybe having to taper [their purchases], we think the markets are going to have a very big problem [during] the back half of the year driven by that.”
Last week, Federal Reserve Chairman Jerome Powell suggested the central bank would be patient in taking action should inflation return.
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On Thursday, Powell said during a Wall Street Journal conference that inflation could temporarily rise as the U.S. economy reopens from the coronavirus-induced shutdowns, but suggested the increase likely won’t be enough to cause policymakers to raise interest rates.
Powell’s comments come as inflation fears, driven in part by a rise in Treasury bond yields, have rattled Wall Street, with some investors worried that the U.S. central bank will pump the brakes and tighten monetary policy sooner than expected.
The Fed likes inflation to run around 2%, although it adopted a new strategy over the summer in which it will keep the benchmark federal funds rate near zero, even if inflation rises above the preferred rate.
On Tuesday Bartiromo asked Niles, how “significant a sell-off” he might expect given the potential rise in inflation.
“I think in back half of the year if you hear the Fed saying, ‘We think inflation is more persistent than we thought and we’re going to have to dial back some of the stimulus,’ I believe the S&P is down 10 to 20% in a matter of a week or two,” he responded.
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Niles also said that he thinks the financial and energy sectors, some of the worst-performing sectors in the S&P 500 last year during the pandemic, have “a lot of catchup still left” as “the economy improves.”
Higher yields mean banks can charge more interest hence financial stocks are moving higher.
Niles also noted that technology stocks, which were “the biggest beneficiary of 10-year Treasury yields getting to 0.5% and from COVID accelerating a lot of trends like e-commerce or streaming,” will be “hurt” by rates increasing “as we’re all out at restaurants and on vacation and driving places versus being glued to our screens because we have nowhere else to go.”
FOX Business’ Jonathan Garber and Megan Henney contributed to this report.