The Fed’s Plan for a Plan
Contributed by Doug Walters, Max Berkovich
There was nothing to distract investors from a barrage of repetitive headlines about inflation risk in a fairly quiet news week. Higher inflation is a certainty, near-term, due to the pandemic dynamics, so the question is whether or not the increase is transient. The Fed continues to believe the rise in inflation will come and go, but they did drop an interesting nugget in their meeting notes published this week.
The Fed must balance its words more carefully than any other institution as trillions of dollars hang in the balance of every utterance. As discussed last week (Inflation Concerns Overdone), investors have been watching carefully for any sign that the Fed might begin tapering their assets purchases. These asset purchases have been a big tailwind for stocks, so signs of tapering could quickly create a headwind. This week in the Fed’s FOMC minutes, we got that first hint of taper talk. The notes indicate that some participants in the meeting suggested that if the economy continues to progress, it might be appropriate to think about… thinking about… discussing tapering. Now that is what I call being careful with your words.
The U.S. stock market handled this little nugget from the Fed reasonably well. Although the market was volatile, it ended fairly close to where it started.
Labor Pains
- Labor shortage headlines are echoing around Capitol Hill, prompting 22 governors to end their state’s participation in the $300 boost to weekly unemployment benefits. However, unemployment varies significantly by state. The states that suffered the most from pandemic still exhibit the highest rate of unemployment.
- The governors’ anecdotal arguments are that the unemployment benefits are too generous and disincentivize people to go back to work. However, the San Francisco Federal Reserve provided some evidence that the impact on the labor market from the unemployment boost is likely minimal. The researchers at the SF Fed stated, “A job is worth much more than temporary unemployment insurance payments.”
- Other contributing factors preventing people from returning to work are concerns about safety and lack of childcare.
Fed Speak
The main takeaways from the Fed’s FOMC meeting minutes this week were:
- The economy remains far from its goal.
- Inflation risks are balanced, and the Fed sees the latest increase in inflation as transitory.
- The Fed will most likely begin discussing tapering at upcoming meetings, especially if there is any evidence supporting more permanent inflation.
Earnings Report
- The first-quarter earnings season shows an epic comeback from an economy that seemed to be in a dire situation just a year ago. The quick response by our government has helped corporations to swiftly return to growing their profits.
- The S&P500 earnings grew by over 51%, the highest year-over-year earnings growth rate since 2010.
- The retail industry joined the rest with blowout earnings results this week, with stores like Home Depot, Lowe’s, Target, and Walmart far exceeding their sales and earnings expectations.
- Except for Industrials, all sectors showed positive earnings growth this quarter vs. a year ago.
- The Financials sector remains the largest contributor to earnings growth this season, followed by Technology, Discretionary, Communication Services, and Health Care sectors.
Crypto-Cracks
Cryptocurrencies continue to come under pressure. Bitcoin is down well over 40% from its April peak. This space has come under pressure as countries have begun to tick up the rhetoric on regulation. This week, Treasury Secretary Yellen has proposed new reporting requirements to the IRS on any transfers over $10,000.
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