Janet Yellen Kicks off Small Cap Rally With Stimulus Comments

Stimulus, stimulus, and more stimulus.

The market’s almost one year removed from the initial Covid-19 crash and the conversation remains the same. There’s no doubt about it, bulls want more “government cheese.”

And Congress seems more than willing to give it to them.

But this morning, it’s Treasury Secretary Janet Yellen that has investors feeling optimistic about the future. She said in an interview yesterday afternoon that a large relief package is necessary if the U.S. is to make a full recovery.

“We think it’s very important to have a big package [that] addresses the pain this has caused – 15 million Americans behind on their rent, 24 million adults and 12 million children who don’t have enough to eat, small businesses failing,” Yellen explained.

“I think the price of doing too little is much higher than the price of doing something big. We think that the benefits will far outweigh the costs in the longer run.”

Small caps ripped higher in response to Yellen’s comments, outpacing the rest of the market by a wide margin. The Russell 2000 is up a stunning 2.40% as of noon. The S&P (+0.40%), Dow (+0.20%), and Nasdaq Composite (+0.95%) are enjoying far less impressive gains by comparison.

Yellen also did her best to alleviate concerns about inflation, which has quickly become a point of contention among analysts.

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“Inflation has been very low for over a decade, and you know it’s a risk, but it’s a risk that the Federal Reserve and others have tools to address,” she said.

“The greater risk is of scarring the people, having this pandemic take a permanent lifelong toll on their lives and livelihoods.”

Yellen continued, remarking that additional fiscal spending will be rolled out over “many years.” Some, like Rabobank strategist Michael Every, took it as a sign of more trillion-dollar-plus relief packages to come.

“Does this administration, with the slimmest of Congressional majorities, have many years to realistically plan such stimulus over?” asked Every.

“What Congressional appetite will there be for another huge stimulus package focused on infrastructure when unemployment is already back at zero in 2022, as planned?”

That’s right, Yellen plans on getting unemployment to zero by 2022 via government stimulus. The question remains as to what will happen when the relief packages eventually peter out.

Every’s worried that wage inflation could spike if Yellen achieves her goal. Moreover, he compared her current stimulus dreams to an economic, “short-term sugar rush” that might ultimately leave the U.S. in a cash-induced hangover.

Making matters worse is a Fed that seems unlikely to raise rates any time soon, applying even more pressure to both headline and wage inflation.

The end result should be continued, highly volatile price discovery among all assets – including equities, bonds, precious metals, and even cryptocurrencies. It’s never been more difficult for investors to ascertain something’s true value.

Maybe that’s why Bitcoin just hit a new all-time high today (at roughly $54,000) while gold’s spot price sunk. Treasury yields are rising, too.

In a market where up is down and left is right, nearly any outcome seems possible.

Including another equity rally, driven purely by stimulus and liquidity-addicted bulls.

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