No Tantrum for Investors
Stock and bond investors handled the Fed’s taper announcement well, with no tantrum, thanks in part to the Chairman not taking away investors’ low Fed funds rate pacifier.
Contributed by Doug Walters , Max Berkovich ,
The Federal Reserve successfully navigated its first step in pulling back some of its asset purchase stimulus known as quantitative easing. Ever since the Fed started hinting at this move, the fear was a repeat of 2013’s “taper tantrum.” Tantrums are for infants, so either investors have grown up, or they are content for now to be soothed by a low Fed funds rates.
The Fed has two crucial tools in its arsenal for combating economic slowdowns: the Fed funds rate and quantitative easing. Many are familiar with the Fed funds rate. When you hear about the Fed raising or lowering interest rates, it is the Fed funds rate. When the Fed wants to stimulate economic activity, it will lower the Fed funds rate, encouraging low-interest-rate lending. Right now, the target rate is 0-0.25%, i.e., very low as the Fed combats the pandemic slowdown.
While the Fed funds rate is a way to control short-term interest rates, it is not always effective in impacting longer-term loans like the ones used for house purchases. Enter quantitative easing. Here the Fed uses its balance sheet to purchase longer-dated bonds to drive up demand and drive down yields. As part of its effort to combat the pandemic, the Fed upped its asset purchases to $120B per month. This week, the Fed announced it would reduce those purchases by $15B a month (“tapering” its purchases).
Any fear that investors would react negatively to the official taper announcement was quelled this week. The Fed’s announcement was met with falling bond yields and rising stock prices. Investors were well-prepared by the Fed for this move. But perhaps more important were the comments that the Fed would be patient in raising interest rates. This pacifier ensured no tantrums.
Headlines This Week
US Stocks put in another positive performance, continuing an exceptional start to the fourth quarter. Particularly impressive is the ability of stocks to continue rising despite the Fed beginning to taper its asset purchases.
As expected, the Fed announced it would be tapering its monthly $120bn in asset purchases. The plan is to withdraw $15bn each month, which, at that pace, would result in the complete withdrawal of stimulus by mid-2022, though the rate will be adjusted as necessary. In addition, Chairman Powell said there are no plans for “liftoff” (i.e., beginning to raise the Fed funds rate). Some analysts fear that the Fed is behind the curve on raising rates, but the Chairman was adamant they are not and that the current bout of inflation is transient.
Getting Back to Work
The much anticipated monthly jobs number (non-farm payrolls) came out on Friday and beat expectations. 531K jobs were created in October, ahead of the 450K estimates. In addition, previous months were revised up. Unemployment fell from 4.8% to 4.6%. It is a good sign, particularly as the job market was still contending with some delta variant headwinds.
Thus far, over 89% of companies in the S&P 500 have reported their Q3 earnings, and it remains a remarkable earnings season. Over 77% of companies beat expectations on sales with year-on-year growth of over 17%. Over 82% beat on earnings, with year-on-year growth of over 39%. Those are big numbers! We hear a lot from economic commentators about the coming “slowdown.” These comments need to be put into perspective. Growth of this very high pace is unsustainable, so a slowdown is inevitable. The question is, does growth slow down to a still high healthy pace or a low and unhealthy pace? Millions of investors ponder this question every day, and the recent performance of the stock market would suggest relatively few are betting on the latter.
As we type, the House is preparing to hold a vote on both infrastructure bills (traditional and social infrastructure). If the vote is held, and if the latter bill passes, it would still need to clear the Senate, which could take the rest of the month or more. Both of these bills have the potential to provide economic stimulus at a time when the Fed is beginning to pull back.
The Week Ahead
On the Rise
Next week’s headline, as it has been for most of the year, will be the inflation numbers coming out on Wednesday.
- The yearly US consumer price index (CPI) is expected to remain elevated as forecasts for October’s numbers are set to hit 5.8%, up from 5.4% previously.
- If correct, inflation will hit its highest level since 1990.
- The producer price index (PPI) is out Tuesday, with hopes that it will show signs of slowing as it is a leading indicator of the CPI.
- The Fed and the market are both hoping that this run of high inflation proves to be transitory, which Chairman Powell defined last week as meaning not short-lived, but whether the current trend of rising prices will lead to “permanently or persistently high inflation.”
There are still a few other data points in an otherwise quiet week to be on the lookout for.
- The Michigan Consumer Sentiment Index is out on Friday, which has remained depressed at early pandemic lows, causing concern if it doesn’t start to trend upwards in the near future.
- Also on Friday is the JOLTS Job opening figure which is expected to remain elevated above 10 million but hopefully still below the July high of over 11 million job vacancies.
- The United Kingdom’s third-quarter GDP numbers are out on Thursday with an expectation that the British economy grew by a meager 1.5%, slowing from the second quarter’s 5.5% growth.
Earning’s season is coming to a close as 89% of companies have reported this season, but a few big names are set to take the stage next week.
- Monday will see PayPal (PYPL) and AMC Entertainment (AMC) report after quite the volatile year for the latter.
- On Tuesday is Coinbase (COIN), the cryptocurrency trading platform, which has struggled to make meaningful gains after its IPO in April of this year.
- Rounding out the week will be Disney (DIS) on Wednesday and AstraZeneca (AZN) on Friday.
Happy Veteran’s Day
Next Thursday is Veteran’s Day, and Strategic would like to thank all those that have served our country.
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