Believe It Or Not
Growing up in the '80s, I used to watch a show called "Ripley's Believe It Or Not" hosted by Jack Palance. The show would highlight strange occurrences, odd historical facts and unusual artistic activities that are hard to explain. In his unique style, Palance would look into the camera as it would zoom in and slowly say, "Believe It...Or Not!" I feel like we're living in an episode of Ripley's right now. Things that are not so hard to explain are labeled "unbelievable" or impossible and things that are seemingly ridiculous are labeled as normal or ordinary. Let's investigate what we've seen so far this week...
Fed Stirs the Pot. The Fed stirred the pot last week with a head's up that Tapering would begin in the 4th quarter. Unlike 2013, markets are better prepared for the unwinding of Fed purchases of assets. The Fed was counting on this. We believe that, unlike 2013, markets should operate a little more orderly. We are seeing the market already adjust in real-time to the prospect of higher interest rates. Since the Fed's Open Market Committee meeting concluded last week, the yield on the 10-year Treasury Bond has risen 19 basis points. This has placed high-growth/tech stocks in the cross-hairs. Over that same time period from last week, the Technology sector has sold off 3.3%. Meanwhile, the more cyclical sectors - Financials, Energy, Basic Materials, and Industrials are all up over the last week. That's a short-term time period as a sample size, but this is indicative of the shift in markets that we have been expecting due to Tapering. Expect this battle between Tech & Cyclicals to continue over the next couple of months as investors married to Technology stocks grapple with the shift in valuation. There has already been some dip-buying in Technology stocks.
Inflation Not Going Away. As an anecdote to how inflation is not so "transitory," the Dollar Tree company recently announced that prices across its 16,000 retail stores will be going up. The company that has promised to sell items for $1 or less, will now price some items at more than $1 - even as high as $3 or $5 per item. In case you're keeping count at home, that's a price increase of between 200% and 400%. Still think inflation is transitory? Oh, and by the way, that's a silent tax on lower income households, as many in that demographic are loyal customers to Dollar Tree. One of the Fed's preferred measurements of inflation - in lieu of PPI & CPI - is PCE Prices (Personal Consumption Expenditures). For the past 3 months, PCE Prices have been incredibly stable. However, the release this morning for Q2 as of September shows 6.5% versus only 3.7% last quarter. The expectation was for PCE to be revised down to 3.7%. In testimony before the House Financial Services Committee, Fed Chairman Powell finally publicly acknowledged concern over inflation.
On top of that, you have inflationary pressures at the pump and renewed price increases in the Natural Gas market. Some countries have signaled potential shortages in energy during the coming winter months. Lack of supply and expected increased demand has pushed prices higher in those commodity markets. Gas prices affect all consumers with automobiles, but can also filter into airline ticket prices - an industry still struggling to recover from the pandemic.
In Other Economic News... The economic releases have been mixed this week. One of the metrics we are closely watching is Continued Jobless Claims (those on unemployment for more than one week. While the number slightly disappointed this week (2,802k vs 2800k) the total has dropped by 106,000 since the Labor Day weekend, when extended pandemic unemployment benefits ended. While that's not chump-change, we would still like to see that number come down precipitously. Weekly Claims disappointed this week, as well. Manufacturing data out of the Dallas & Richmond Fed regions declined. Second Quarter GDP was revised slightly higher from 6.6% to 6.7%. Durable Goods and Wholesale Inventories improved, likely reflecting higher prices from inflationary pressures and shipping delays. Pending Home Sales jumped more than 8% month-over-month. This morning, Personal Spending cam in higher than expected (+0.8% vs. +0.6%), while Personal Income was slightly lower than expected (+0.2% vs +0.3%). The National Financial Conditions Index, as tracked by the Chicago Federal Reserve continues to show steady economic conditions. The economic data is likely to be choppy as investors and consumers alike try to navigate the Fed's moves and inflationary pressures.
Also In the "Believe It Or Not" Vain. Some of the activity going on around the world is staggering to say the least. The positive test rate for COVID here in the U.S. has dropped substantially over the past 2 months. Currently, testing is resulting in 6.8% of positive COVID cases, compared to 10.2% just 40 days ago. And, that low number is with more than 1.3 million tests. The current trends looks very good. Hospitalizations are down 18% since the peak on Aug 30th. What is more noticeable is that the total number of ICU beds available is nearly 2% lower from 4 weeks ago and nearly 7% lower from the COVID peak of January. It would seem that hospital workers required to get the vaccine who have opted out are either being let go or are voluntarily quitting before being let go. That's certainly disruptive to hospitals treating both COVID & non-COVID patients going forward. it will be imperative to watch those voluntarily quitting their jobs or losing their jobs to determine if it's having an effect on Jobless Claims going forward. Last year's "heroes" during the pandemic are this year's "villains" - remind me not to sign up to be a hero.
In Australia, a country seeing a spike in cases, the government has instituted severe lockdowns and harsh punishments. Some of the pictures and video coming out of that country are alarming. Australia did not have a large percent of the population get infected with COVID in the first two waves of the virus last year. In fact, when compared to the U.S., Australia has had a much easier time with COVID. At peak daily cases last year, the U.S. had 304,794 in one day - Australia peaked 3 weeks ago with 2,043 in one day. At the peak of daily deaths, the U.S. had 4,489 in one day - Australia peaked last year with 59 deaths in one day! So, it's not a surprise that a spike in cases in Australia is happening now. Yet, the case fatality rate in Australia is actually slightly better than in the U.S. Australia has a case fatality rate of 1.2%, while the U.S. has a fatality rate of 1.6%. In terms of deaths per 1 million people, Australia ranks in the top 17% in the world for fewest deaths. Simultaneously, Sweden, Denmark, & Norway have all ended COVID restrictions as those countries had 2-5 times as many COVID cases and 5-10 times as many COVID deaths as Australia. The type of over-reaction we are seeing in Australia won't do their economic progress any good. I guess, be careful what you wish for from government...