Skip to content
Weekly Insights
Subscribe
Volume 10, Edition 38 | November 1 – November 5, 2021

No Tantrum for Investors

Doug Walters, CFA
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.

Taper Talk

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.

Earnings Power

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.

A Vote?

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.”

Data Watch

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.

Wrapping Up

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.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $2 billion.

Overview

Disclosures

Strategic Financial Services, Inc. is registered with the Securities and Exchange Commission (SEC) as an Investment Advisor. The term “registered” signifies compliance with regulatory requirements and does not imply a certain level of skill or training.

The information provided on our website, including weekly market commentaries, financial planning articles, and other educational resources, is intended solely for educational purposes. It is designed to offer insights into financial planning and investment management, aiming to enhance understanding of financial concepts, strategies, and market trends. This content should not be interpreted as personalized investment advice or a recommendation for any specific strategy, financial planning approach, or investment product. Financial decisions are deeply personal and should be made considering the individual’s specific circumstances, goals, and risk tolerance. We recommend consulting with a professional financial advisor for personalized advice.

Please be aware that Strategic Financial Services, Inc. does not provide legal or tax advice. The content on this website is not intended to be used as such or as a substitute for legal or tax advice from a licensed professional. We advise seeking guidance from qualified legal and tax advisors regarding these matters.
Investment Risks and Portfolio Management.

The discussion of any investments on this website is for illustrative purposes only and provides no guarantee that the advisor will make any investments with the same or similar characteristics as those presented. The investments identified and described herein do not represent all the investments purchased or sold for client accounts. The selection of representative investments to discuss is based on various factors, including recent company news or earnings releases.

It should not be assumed that any investments discussed were or will be profitable. All investments involve risk, including the potential loss of principal. There is no assurance that investments mentioned will remain in client accounts at the time you view this information.

When index returns are mentioned on this site, they are provided as a general indicator of market conditions and are not representative of any client’s portfolio performance. Indices are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly. Therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

While index returns are used as a framework to report on general market conditions, they should not be construed as an indicator of future performance of any specific investment or portfolio. Discussion of index returns is intended to provide context and insight, not to suggest that clients will achieve similar results. Each client’s portfolio is managed according to their specific investment goals and financial situation.

The opinions and any forward-looking statements expressed in the articles and videos featured in our resource center are as of the date of publication. These statements are based on current laws, regulations, market conditions, and other relevant factors, including third-party data. Given the dynamic nature of financial and regulatory environments, as well as potential changes in market conditions or economic circumstances, the information provided may become outdated or may no longer be accurate.
We rely on third-party data to form our opinions and projections, which means that these are subject to the same uncertainties that affect all data-dependent analyses. As such, we advise readers to exercise caution and not rely solely on the statements made herein for making financial decisions. It is recommended that investors consult with a professional advisor who can help assess the relevance and accuracy of the content in light of the current economic climate and personal financial situation.

Our website contains links to third-party websites as a convenience to our users. Strategic Financial Services, Inc. does not control, endorse, or guarantee the content found on such sites. We are not responsible for the accuracy, legality, or content of the external site or for that of subsequent links.
Contact the external site for answers to questions regarding its content.
The inclusion of any link does not imply our endorsement of the site, nor does it imply any association with its operators. Use of any such linked website is at the user’s own risk.

Related Resources