Inflation concerns appear to be getting the blame for the stock market’s melancholy behavior the past few days.
During a speech in Berlin earlier this week, European Central Bank President Mario Draghi said he believed the ECB’s policy of lowering rates to record low levels and buying massive amounts of bonds had benefited the economy by “boosting consumption and investment and creating jobs.” Draghi went on to declare victory over deflation, stating that the ECB had “succeeded” in removing the threat of cascading prices and falling demand, after a recent report showed inflation rose 0.4 percent.
Stocks began the trading day in the green, but it didn’t take long for gains to turn into losses. Though the major moving averages vacillated in a narrow trading range again for most of the day, by the closing bell they were trading at their lows of the day, with the Standard and Poor’s 500 down 0.3 percent and Nasdaq Composite lower by 0.62 percent.
Investors seem to be connecting the dots that there are now more signs of inflation going which includes, in some cases, higher commodity prices. As a result, bond prices are falling this week — both in the U.S. and abroad — with the ICE U.S. Treasury 20+ Year Bond index down 1.78 percent over the past five trading days. Not surprisingly, dividend-paying stocks are declining as well, with the Dow Jones U.S. Real Estate index down 2.29 percent on Thursday alone.
This week, we are seeing a large inflow of money into Treasury Inflation Protected Securities (TIPS) Bonds. For all those investors who may have been lured to take on more risk in exchange for higher interest rates, this might be a wake-up call.
The top-performing bonds this week are indicative of investors anticipating higher interest rates, led by the Barclays 1-3 Month U.S. Treasury Bill Index, unchanged over the past five trading days.