The Importance of Language
The Fed rocked markets with a more hawkish tone after their Wednesday meeting last week. However, some of the language used in their statement got lost on the market. It has always interested me that the Billboard hit song "Ironic" by Alanis Morissette describes situations that are not ironic at all. Some of the situations are sad, some are tragic. However, an entire generation grew up listening to a song with incorrect language. Today, we have markets that are incorrectly responding to language that is as plain as the rising sun.
In 2013, the Fed rocked markets with "tapering" language to describe the end of bond/asset purchases. Equity markets declined almost 5% from May 22nd to June 24th of that year. They say that history doesn't repeat itself, but it rhymes. Well, history did repeat last week as the market sold off nearly 2% as the Fed announced higher economic projections and rate hikes one year earlier than expected. The Fed pointed to higher inflation, higher economic growth, lower unemployment when announcing that it projects 2 rate hikes in 2023, versus previous the previous rate increase target of 2024. Yet, the market ignored some important language that the Fed's statement removed. Previous wording such as "tremendous human and economic hardship" and "ongoing public health crisis" were taken out of the Fed's latest statement. This means the economy is healing and the need to raise rates in 2023 is justified. This is good news!
The biggest concern for market projections should not be whether or not the Fed is tapering, but rather, whether the current supply chain and labor shortage issues will correct. Currently, 1-2 year old used cars have more value than new cars. Why? There is a shortage of labor to get new cars from the factory to the new car lots and there is a chip shortage that is preventing new cars from coming off the assembly line ready for purchase. These issues persist among other products, as well. Some labor shortages should correct soon as states have opted out of expanded pandemic unemployment benefits. These benefits ended last week in some states and will end over the coming weeks in other states. We are still about 7.6 million jobs shy of where we were pre-pandemic.
The "Delta" variant of COVID has been of great debate in various circles, especially with regard to India. So far, Daily Cases and Daily Deaths in India have declined 87% and 77%, respectively, since peaking in early May. Meanwhile in the U.S., daily activity is close to reaching pre-pandemic norms. Hotel Occupancy and In-person Dining are within 10% and 12%, respectively, of pre-pandemic levels. Air Travel is still 27% below pre-pandemic levels, but has made up ground quickly since March. This should also serve as optimism for economic prospects given the Fed's recent actions.
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