Back to Push and Pull
Back in March, I wrote about how the market was acting a bit schizophrenic. Five months later, we're back to a similar situation in which there is a push-and-pull battle between COVID restrictions hurting global growth or economic recovery on track. There is a variance between economic data releases from week-to-week. Even though the Fed says the economy is recovering (more on that later), the markets are worried about future growth. It's like the Paul Simon song, "You Can Call Me Al." According to Simon, the song came from a funny memory of him and his first wife, Peggy, entering a party in New York and the host not knowing who they were. The host introduced them to his guests as, "Al and Betty." Maybe we're still in an economic recovery, but we're just not going to call it a recovery because we want the Fed to keep the faucet of stimulus turned on. Here's what we're seeing so far this week...
Fed Says Economy Recovering? Despite a strong jobs report from July and strong manufacturing data from last month, some are doubting future growth prospects as COVID cases have risen and consumer confidence has dipped. Yesterday the market did not react well to the release of the minutes from last month's Fed meeting. The minutes revealed most committee members agreed that tapering bond purchases should begin this year, should the economy continue to improve, especially the labor market. "Most participants judged that the Committee's standard of 'substantial further progress' toward the maximum-employment goal had not yet been met," according to the Fed's minutes. "Most participants remarked that this standard had been achieved with respect to the price-stability goal." Some believe that an announcement regarding tapering could come later this month at the Jackson Hole, WY symposium. While we believe this is good news - i.e., the economy is at a point where it can stand on its own - the market did not take kindly to the news.
At 1:00 Central time Wednesday, the S&P 500 Index was trading up 0.3%. As soon as the Fed minutes were quickly parsed for information, markets began selling off (see chart below). The S&P 500 Index finished the day down more than 1% on the news. This is a day the markets have been made fully aware of for quite some time. In 2013, when the Fed first announced the tapering of bond purchases, the S&P 500 Index sold off by more than 5% over the following 23 trading days. However, the index finished much higher by year-end, recovering all of those losses and gaining 17% from those June lows. At the same time, the yield on the 10-year Treasury bond increased from 2.03% to 3.04% by year-end. If we can expect a similar move this time around, the 50% increase in yield would take the 10-year Treasury yield from 1.26% today to 2.76% over a 6-8 month period. Time will tell, but fixed income portfolios ought to be diversified away from government and corporate bonds with longer durations.
Other Economic News This Week. Yesterday we saw Initial Jobless Claims come in at 348,000. That is 29k less than last week and 15k less than expected. To put that number into perspective, we are now within 137,000 claims of the pre-pandemic low. The market is viewing this information in a negative light as it is further evidence of recovery in the labor market and provides an environment for a change in Fed policy. In other news, Housing Starts dipped more than expected, but Building Permits increased for the first time in 5 months. Capacity Utilization (which measures the production capacity being utilized - factories, mines, and utilities) increased by almost 1 percentage point and was higher than expected. Industrial Production (which measures the change in inflation-adjusted output produced by manufacturers, mines, and utilities) increased for the 5th consecutive month and nearly doubled the market's expectations. Earlier in the week Retail Sales came in much lower than expected (-1.1% vs -0.3%). This sent the market in a tizzy as future growth is in doubt. Yet, it is important to note in the graph below that retail sales have been volatile since the pandemic began over 1 year ago. Until consumers' concerns are eased, retail sales are likely to remain choppy month-to-month.
COVID Cases Contributing To Growth Concerns. The media is famous for quoting COVID numbers in a selective manner. Cases are on the rise, but the rise is due primarily to the Delta variant. Though more infectious, the Delta variant is less deadly than the original strain of COVID. Why? More vaccinations, better medical treatments, and better knowledge about COVID than 1 year ago. The mortality rate in the U.S. from COVID is 1.7%, which is just slightly lower than what the mortality rate was at 1.8% just a few months into the pandemic. If we take a snapshot of just the past 6 months and break it down by age, the average Fatality Rate is 0.002% for those under age 74. However, even for those above age 74, the Fatality Rate from COVID only moved to 1.98%. Cases are rising, but Deaths are not close to the levels of last Fall. Also, despite some reports to the contrary, Hospitalizations are currently still below the levels seen at the peak in early January, so far reaching only 75% as high as early in the year. Reproduction rates for the Delta variant are decreasing in key states like FL, MO, AR, TN, LA, MS, & TX, which could indicate a peak in cases soon.