Four experts discuss what her comments mean for markets and how to invest as the pandemic continues.
Jim Stewart, columnist at The New York Times, says the benefits of overspending far outweigh the risk.
"The question is is there a greater risk in overspending than in underspending? It's pretty clear. I mean, what's the risk of too big a stimulus? Maybe higher interest rates down the road, maybe a little inflation, but as Yellen pointed out, we have the tools to deal with this. The risk of underspending is further and greater unemployment, a downward spiral in the economy, possibly a recession. That is much harder to get out of, so I think her point about the risk is pretty indisputable. ... Of course this is very good for the stock market. I mean just look at current levels, which I think largely are anticipating this significant stimulus. That is very bullish, and ironically, the people who own stocks and are benefiting from this tend to be the ones that have not been hurt so much by the pandemic. Specific elements that are aimed at helping people hurt by the pandemic, I think it's a very blunt instrument. It's not very closely tailored to help those particular people, and I think that is something that has troubled some of the critics of it, but nevertheless, if what you're trying to do is keep the economy thriving, you know it's not going to be perfect."
Liz Young, director of market strategy at BNY Mellon Investment Management, welcomes the increase in rates.
"The real question here is should rates be going up and why are they going up? And I think yes, they should be going up, and they're going up because the economy is expanding, we're expecting further expansion later in the year, we're expecting big improvement in corporate data, and we're expecting a little bit of inflation. Inflation continues to get kind of a bad rap. Inflation means there's healthy demand in the economy, so I welcome the rise in rates. And the question about what's the breaking point, when does it matter for the market, I don't know what the magic number is, I don't know that there is a magic number about the mental threshold of when it's going to actually turn us down. I think it's more about the speed with which we get there. And if we gradually go up in rates throughout the year I think that's okay and we can digest it, so I'm okay with this rate rise. I think there's going to be volatility in 2021 in the Treasury curve. I would lean into that volatility and use it as a buying opportunity if it does cause a pullback in stocks."
Katerina Simonetti, senior vice president at Morgan Stanley Private Wealth Management, looks ahead to how changed consumer behavior could impact markets.
"The market has been heavily supported. It is strong. The earnings season delivered some great surprises. And I think that we're definitely getting on board with the reopening philosophy and getting behind the cyclical names and getting behind the story of the reopening and repositioning our portfolios to reflect what's going to come in that post-vaccine, post-Covid type of era, which is really exciting. But having said that, I think that consumers have developed some really powerful habits over the course of the last nine months and stay-at-home names should definitely not be discounted. There is a place for them in the portfolio. And, you know, we certainly are paying attention and owning them."
George Cipolloni, portfolio manager at Penn Mutual Asset Management, looks at how Federal Reserve policy has shaped investor behavior.
"When you think of the Fed's impact, they've had two major impacts here — they've kept interest rates low, which has driven up asset prices. And number two, they have stimulated a certain behavior in the market where people tend to be a little more irresponsible. And we've seen that through certain examples of specific stocks like GameStop. ... That is behavior that is being led through Fed action, so that is something to be cautious about. And then just going back to this reflation trade, I think it's important. We are income investors, so you are seeing a dramatic impact in the bond market today, and I think that's another thing that's very, very important to keep an eye on."