Stocks and index ETFs are mixed-to-higher on Wednesday as investors contend with political uncertainty, a growing pandemic, and rising interest rates.
The S&P 500 added 0.2%, while the Nasdaq Composite gained as much as 0.6% before stumbling. The Dow Jones Industrial Average dipped slightly below breakeven.
Major stock ETFs are also mixed on Wednesday, with the SPDR Dow Jones Industrial Average ETF (DIA) marginally lower, while the SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust (QQQ) are positive after 12:30 PM EST.
The most recent inflation data release and the U.S. consumer price index were on investors’ minds Wednesday, as the index climbed 0.4% in December, a value in line with a Dow Jones estimate.
Stocks and index ETFs rallied strongly in the first week of the new year, but have begun consolidating since then.
“The market rally has taken a break this week,” said Mark Hackett, chief of investment research at Nationwide. He noted, however, that “sentiment and risk indicators continue to reflect investor optimism, with credit spreads at their tightest level since before the pandemic, fear & greed indicators at elevated levels, and the put/call ratio near historic lows.”
Cautious Optimism in Mid-January
The market has been more cautious amid rising interest rates and political uncertainty and turmoil. The yield on the benchmark 10-year Treasury briefly hit 1.18%, its highest level since March, and has climbed over 20 basis points in 2021, likely due to expectations for additional fiscal stimulus.
“At a minimum, even a USD 500bn fiscal package consisting of additional stimulus checks, extended unemployment benefits, and funding for healthcare and vaccine disbursement will be another boost to economic growth in 2021,” noted Jason Draho, UBS Global Wealth Management head of Americas asset allocation.
Given the rise in rates, analysts like Credit Suisse suggest that investors lean toward pro-cyclical sectors, including financials and energy. This means that ETFs like the SPDR S&P Bank ETF (KBE) and United States Oil Fund (USO) could find favor with investors.
The coronavirus continues to weigh on markets as well, with the U.S. recording at least 248,650 new coronavirus infections and at least 3,223 virus-related deaths each day, based on a seven-day average using Johns Hopkins University data.
Still, many analysts are optimistic about growth prospects for the economy later this year.
“In 2021, the U.S. economy should experience strong tailwinds from additional fiscal and monetary stimulus coupled with an end to the pandemic’s impact on the economy,” said Brent Schutte, chief investment strategist for Northwestern Mutual Wealth Management. “Pent-up demand in industries impacted by COVID-19 … and a needed inventory rebuild should further spur job growth,” he added.
Taken together, Schutte said this could mean better-than-average economic growth, where stocks continue to notch new highs.
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