Morning Roundup

By Mark Masterson on August 16, 2021

Good morning,

Below are the news items moving markets today

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Executive Summary:

Markets open lower to start the week on news and images of Afghanistan’s collapse at the hands of the Taliban and its implications……

White House said to be clearly blindsided and unprepared for the speed of Afghanistan’s collapse (Politico), with images of defeat humiliating the Biden administration (NY Times, WSJ)
Afghanistan added to investor geopolitical risks, with concerns about longer-term scenarios, such as the possibility it could become breeding ground international terror attacks (Bloomberg)

Meanwhile, it’s business as usual in Washington as Speaker Pelosi seeks a path forward for the massive social infrastructure spending bill…….

Pelosi pushes fiscal stimulus compromise with moderates but they say it is not enough:

House Speaker Pelosi said on Sunday she has requested the Rules Committee examine the possibility of a rule that advances both the $3.5T budget resolution and the bipartisan infrastructure package at the same time.
Move comes in the wake of pressure from moderate Democrats in the House, who said they would not vote to support the budget framework unless Pelosi also brought the ~$1T bipartisan infrastructure package already passed by the Senate up for a near-term vote as well.
Pelosi’s attempt at compromise was quickly deemed insufficient by the moderates. Highlights the complicated path to additional fiscal stimulus given the wide gap between moderates and progressives.
A couple of articles this weekend also discussed the complications surrounding the social infrastructure spending plans from the continued pickup in concerns about inflation (Washington Post, FT).

The Fed keeps talking out of both sides of its mouth with non-voters talking about tapering, while voting members remain dovish…..

When it comes to Fed the Fed dialing back policy accommodation, market consensus still seems to revolve around a formal announcement in November or December, followed by tapering either late this year, or more likely, early 2022.
However, a couple of articles today have highlighted some momentum, at least from a headline perspective, behind some of the more hawkish calls.
WSJ said Fed nearing agreement to begin tapering in three months, with some pushing to end QE by the middle of next year.
Added that ending asset purchases sooner could give central bank more flexibility to raise rates if inflation stays high and unemployment falls rapidly.
CNBC highlighted growing support for the Fed to announce a decision to taper and begin the reduction in buying a month or so after. Bottom line is that tapering is coming soon and despite the amount of attention devoted to the timing/pacing debate, there is a relatively narrow gap between hawks and doves.

I’m in the camp that a Fed taper is needed given the lack of any true price discovery in the markets, extreme valuations and sentiment, and inflationary pressures. It would create a more natural and “normal” market. I’m also of the view that the Fed won’t and can’t taper for all the same reasons. If the Fed tapers, the markets will suffer a serious decline as interest rates spike higher and markets adjusted to a reduction in the psunami of liquidity. Essentially, it looks to me that the Fed is trapped in a cycle of QE.

Part of the case why the Fed and other central banks can’t taper in a meaningful way is – they are the buyer of last resort. I have highlighted how the Fed owns over 50% of all 10-20 year Treasury bonds, over 20% of all TIPS, etc. The Fed has bought nearly 80% of all government issuance of bonds over the last 12 months. The ECB has bought 100% of all European bond issuance over the last year. Take a look at where we ended 2020 in terms of global debt………Global debt has reached a record 350% of GDP in times of peace.

If they taper, and stop buying bonds, what happens to interest rates?

With the likelihood that QE will continue – Wall Street has rarely been more bullish…..Analysts most bullish on stocks since 2002:

Bloomberg discussed how most analyst ratings on equities are listed as buys — across major regions.
In the US, that proportion is about 56% for S&P 500 companies, the most since 2002.
Optimism fed by ongoing stock market strength and better than expected earnings, which are bolstering confidence in underlying fundamentals.
Elsewhere, the story noted that in Europe, about 52% of recommendations on Stoxx 600 firms are buy or equivalent, a 10-year high, while in Asia, that number jumps to 75%, the highest proportion since at least 2010.
Q2 earnings season was one of the strongest in history even after accounting for favorable base effects.
Bloomberg analysis showed converting aggregated 12-month price targets for Stoxx 600 members implies about 9% upside for the index from current levels, while for the S&P 500 the implied gain is about 10% and for Asia 21%.

Some discussion about the risk of over-exuberance, though S&P 500 hasn’t seen a peak-to-trough decline of 5% or more in 193 days, about twice the long-term average.

Path of least resistance for stocks has remained higher despite traction behind the peak growth, peak earnings and peak policy themes, as well as the Delta variant driven flare-up in virus concerns.
Bloomberg discussed the slow and steady grind upwards for US equities. Noted S&P 500’s 48 all-time highs since end of December mark best start to a year since 1995.
Added that over the last 100 years, there has been just one other year when the index set more record by this point in the summer (1964).
Also pointed out that the S&P has exceeded the most optimistic target from the start of the year and at least four strategists have raised their year-end targets over the past month.
In addition, discussed how the index has gone nearly 200 days without a 5% pullback, fitting with the resilience of the buy-the-dip and there-is-no-alternative mantras.

Goldman Sach’s suggests the good times will continue as companies buy back more of their shares…..More than $720 billion of stock buybacks will help the S&P surge to 4,700 within months, Goldman Sachs says https://t.co/61NV5z1tss?amp=1

And – investor sentiment has never been higher (black line below) even while consumer sentiment is back to 2011 levels……

Jeff Gundlach mentioned that the “Misery Index” (sum of CPI and the Unemployment Rate) is back in double digits, with an 11.3% reading for June 2021.

So while inflation heats up putting pressure on consumers and producers, the Fed’s liquidity keeps the equity markets higher keeping investor confidence up as well……

Investor Confidence vs Consumer Confidence

Morning Roundup

By Mark Masterson on August 16, 2021

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