Why investors are spooked by the economic rebound

Unpacking this counterintuitive trend

Wall Street.
(Image credit: ANGELA WEISS/AFP via Getty Images)

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It sounds counterintuitive, but an increasingly healthy economy is making investors nervous, said Matt Phillips at The New York Times. Though they "had no trouble gliding past the death and economic devastation wrought by the pandemic," the S&P 500 and other major indexes have wobbled in recent weeks despite the vaccine rollout, the prospects of another stimulus bill, and other positive signs of recovery. Instead, "worry that the economic rebound will cause inflation" has spooked investors. The "mere possibility of painful 1970s-style price growth" could cause the Federal Reserve to raise interest rates sooner than expected. That has made bond investors demand higher returns, and has driven doubts about a stock market fueled by low rates.

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The market is saying "sell Tesla, buy Exxon," said James Mackintosh at The Wall Street Journal. Since early February, Tesla is down more than 20 percent and Exxon Mobil up more than 30 percent, "a stunning reversal of the pattern since the start of last year." That doesn't mean that oil is suddenly back. Tesla is a bet on the long term, and Exxon on the short term. Investors had been looking ahead to the long run. Ultralow borrowing costs made it easy for companies to invest in the distant future. Terrible pandemic prospects made the near future look unappealing. Now that's changing. "Cyclical stocks, those most sensitive to short-run economic growth, have been doing well since COVID-19 vaccines raised hopes of economic reopening." That trend accelerated as it became clear the stimulus would pass. "Exxon is what a winner looks like in this new world of stimulus-driven demand. Oil is the most sensitive commodity to global consumption, and everywhere is heading for reopening this year." Even after the big gains for the companies "bombed out" by the pandemic, I think there's still more to go. Investors are looking for profits "in the here and now." But the long term? That still probably belongs to the Teslas, not the Exxons.

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