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Volume 10, Edition 21 | June 14 – June 18, 2021

Stumbling Across the Finish Line

Doug Walters, CFA
Value stocks are stumbling across the first half of the 2021 finish line as the market tries to digest meeting notes from the Fed.

Contributed by Doug Walters, Max Berkovich

Last week I attended my kids’ track meet. I watched the 800m race, a grueling event; too long to be a sprint but too short to be long-distance. One of the runners who had gone out fast was clearly losing steam in the final stretch. With another runner not far behind, he attempted to pick up the pace only to find himself losing control, half-falling, half-running for the last 20 meters. He held off the competition, but it was not pretty. Value investors seem to be in a similar state of imbalance as we push toward the end of the first half of 2021.

The first half of the year has been a good one for value investors up until this week. The Federal Reserve’s FOMC meeting and subsequent press conferences have tripped up value stocks as we approach the end of June and close out the first half of 2021. So what did the Fed say?

  • They now expect two rate increases in 2023. Previously they had been forecasting none. However, this was already priced in by investors.
  • They are talking about, talking about, reducing asset purchases (i.e., tapering). This was well-telegraphed.

Nothing in those headlines is particularly bad for value investors. It appears the shift may not be directly a result of the Fed’s comments. Investors are also coping with concerns about “peak growth” as year-on-year growth comparisons become more difficult and still trying to grapple with the uncertainty of inflation. The Fed has generally been sanguine about inflation, noting that the current increases are transitory, but did express a slight bit of caution in their comments this week.

Investors are, as usual, dealing with significant uncertainty. This underlines the importance of a well-diversified portfolio, held with patience to benefit from the long-run returns that the markets have to offer.

Headlines This Week

On the Dots

The Federal Open Market Committee (FOMC) indicated that overnight lending rate increases might begin in 2023.

  • While it is still some time away, the Fed is preparing the market for higher rates and reduction in their bond purchasing program, a mechanism that is used to reduce stimulus in our economy.
  • The Fed’s balance sheet has doubled since March 2020, increasing by nearly $4 trillion to combat economic conditions caused by the pandemic.

Reconciliation

A bipartisan infrastructure bill proposal of about $1.2 trillion in spending over the course of 8 years gained some additional support in the Senate. Deliberation on how the bill will be funded is the main sticking point for the support and is holding up progress.

  • In the meantime, Democrats are working to move their own $6 trillion infrastructure bill through the party-line reconciliation process.
  • There is no easy path for a bipartisan or party-line bill. It is looking unlikely that either of the two bills would be passed until after the summer recess.

Lumber Pains and Oil Gains

In the last 12 months, we witnessed a huge rise in commodity prices. Prices of lumber increased over 117%, copper and aluminum rose over 60%, and even pork prices have doubled.

  • Bottlenecks in the supply chain cause the rise in commodity prices, and pressure is felt in nearly every commodity.
  • However, we are beginning to see signs of relief in lumber and copper prices this year, as both declined from their all-time highs.
  • Oil and gasoline prices continue their upward trend with no signs of relief. We witnessed a similar price rise and shortage of gasoline in 2008 as oil prices reached an all-time high.

The Week Ahead

Holiday Weekend

Happy Father’s Day to all the Dads!

  • As a treat, the sports world is serving up the 121st U.S. Open of Golf, three elimination games in the NBA Playoffs, two semifinal matchups in the Stanley Cup playoffs in Hockey, Euro 2020 soccer matches, Major League Baseball games, Ally 400 NASCAR race and Formula One’s France Grand Prix.

Bank on It!

Both the Bank of England and Peoples Bank of China have a rate decision to make, while U.S.’s top banker will appear in Congress.

  • The Chinese Central Bank is expected to keep rates unchanged. However, markets will be focused on China’s attempt to keep the RMB’s exchange rate stable.
  • The Bank of England, while expected to keep rates steady, will have to do some wordsmithing on their plan to hike rates in 2023.
  • Federal Reserve Chairman Powell will testify on the pandemic emergency lending and economic recovery in front of the Congressional Select Subcommittee on the Coronavirus Crisis.

Basic Economics

Final 1st quarter Gross Domestic Product (GDP) will be released, Durable Goods Orders, Personal Consumption Expenditures (PCE) Index, weekly Initial jobless claims, May’s personal income and spending, Home Sales and University of Michigan Consumer Sentiment Index for June are on the calendar.

  • PCE is the preferred inflation metric of the Federal Reserve, so eyeballs will be glued to that one.

Stressing Out

Federal Reserve Bank will release stress test results on Thursday of the biggest banks in the U.S.

  • These tests usually assess the risks these major institutions pose to the economy and financial system under different risk scenarios.

Trip to Belgium

The European Council will meet in Brussels.

  • The council will take stock of the epidemiology and vaccine situation and discuss coordinated efforts to remove any remaining obstacles to free movement in the Eurozone.
  • Economic recovery, relations with Turkey and Russia, and a migration situation will also appear on the agenda.

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