The recent trends in the stock market are taunting the Federal Reserve as growth stocks have seen an explosive increase. In just one week, the Russell 2000 Growth index increased by nearly 9% between July 9th to July17th. This is the fastest rate growth stocks have seen in over two months, which only adds to the already growing list of challenges the Federal Reserve is facing.
The rise in growth stocks can largely be attributed to reopening plays, such as technology, healthcare and consumer cyclicals that are set to benefit from the global economic recovery. According to Goldman Sachs, these sectors have seen the fastest growth in earnings forecast for this year and are expected to continue to outperform in 2021. Consequently, investors have heavily invested in these sectors, driving the Russell 2000 Growth index to record highs.
The market’s strong performance stands in stark contrast to the economic and labor market realities created by the coronavirus pandemic. The U.S. economy is not expected to reach its pre-pandemic level until the end of 2021 at the earliest and is forecasted to grow at a slow rate in 2022, leaving millions of people without work. This has caused the Federal Reserve to implement various measures to aid businesses and individuals from the economic downturn. So far, these efforts have had a limited impact, and the Federal Reserve is preparing to introduce further rounds of stimulus.
However, the aforementioned increase in the Russell 2000 Growth index isn’t just taunting the Federal Reserve. It also serves as a reminder of the growing gap between the rich and poor. Investors with money to invest are able to take advantage of the current market conditions and benefit from the rising stock prices, while many Americans continue to struggle to make ends meet.
Therefore, the Federal Reserve needs to pay close attention to the trends in growth stocks and find effective ways to tackle the injustices presented by the market’s current state. That means not only improving the current economic conditions but also finding a way to ensure that everyone is able to benefit from the recovery. Only with such an approach, can the Federal Reserve reassert control over the market and bring economic stability back to the United States.