Morning Roundup

By Mark Masterson on August 25, 2021

Good morning,

Below are the news items moving markets today

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Executive Summary:

 

Another modestly positive day across capital markets as we await Powell’s comments later this week at the Jackson Hole meeting.

I believe this meeting is coming at an important time.  It looks as if capital markets are waiting on clarity as to whether the Fed really intends to taper, or if it is just lip service.  This week’s comments from Powell will provide more clarity.

Will Powell pivot and push out the potential taper?

Will Powell deliver more detail as to how and when the Fed will taper?

How those questions are answered will dictate how various assets perform in the short term (coming weeks).

 

Below I’ll outline some thoughts on where we stand mid-quarter Q3……

First – our view that the second half of 2021 will be a transition from “Great” to “good” is clearly playing out.

The 2^nd quarter was great.  Note that in the 2^nd quarter……

• S&P 500 earnings hit a record high for the 2nd straight quarter.
• GAAP earnings increased 174% year-over-year
• Operating earnings increased 94%.
• S&P 500 sales hit a new high in Q2, surpassing the prior high from Q4 2019.
• The 21.7% increase over last year was the largest YoY increase in history

 

Those earnings results will likely mark the peak.

We are clearly seeing the fundamental data rolling down to “good” from great.  For example……

• Citi economic surprise index falling for months straight as economic results miss expectations. Still good, but not great.
• GDP estimates lowered…..BofA cuts Q3 GDP growth from 7% to 4.5%. We will be moving back towards normal growth rates (2%) over the coming quarters as the impact of stimulus and spending lessens.
• Consumer confidence down to 2011 levels. Consumers feeling the pinch of inflation.
• Retail sales missed again.

 
So – as the data rolls over a bit, we’d expect market volatility to increase in the third quarter and beyond…..

For example – if this is in fact the second year of a new bull market – it has always led to more volatility in year two of the rally/recovery.  In fact, 10% declines are the norm…….

Yet – this year we have had zero volatility.

Strategas

 

The 2021 rally has so far looked more like the “run-away” or “blow-off” move you tend to see at the end of a bull market.  The below chart shows how strong the rallies are in the final 6,12,and 24 months of a bull market.  This goes back to 1937.

The rally that started last year will likely surpass even the best returns in the chart below…..

The visual of the S&P 500 since last November is the picture perfect image of a run-away move.  Notice that we have seen no volatility.  Every decline has stopped at the blue line/50 day moving average.

The below chart is a great illustration of how the drawdowns are getting smaller and smaller as this rally continues.  The small dips reinforce even faster dip buying.  That is the nature of a run-away move.

 

 

That brings me to Jackson Hole and the Fed.

It’s very clear that the Fed’s liquidity and QE injections of over $120 billion per month have clearly leaked into the market.  The below chart shows the blue line (Fed’s balance sheet/QE) and the S&P 500 (red line).  They are moving in lockstep.

Therefore – what Powell says on Friday will very likely have an impact on the immediate direction of equities.

Key Question:  Will the Jackson Hole Meeting be a Pivot Point for markets?

Taper talk continues and perhaps Powell lays out more detail of timing = Pivot Lower for stocks

Taper off the table as Powell highlights new risks such as a slowing economy, Covid cases rising, or the Afghanistan withdrawal chaos…..  This would likely help stocks breakout higher.

 

• Fed tapering bond purchases could pressure stock market: Jeffrey Gundlach https://finance.yahoo.com/news/federal-reserve-tapering-bond-purchases-could-pressure-stock-market-jeffrey-gundlach-202824771.html?ncid=twitter_yfsocialtw_l1gbd0noiom

Most markets have been making modest new highs over the past few weeks.  However, it has been a crawl.

Below is the Dow for example.  You can see that markets are creeping higher, but the conviction has not been high.  Perhaps they are just waiting on more clarity from the Fed.

 

Moving on…..

The Fed and Powell are focused on a few key metrics……

Inflation is rising.  It is not likely to be transitory as Powell hopes it will.  You can see below it is trending higher, and will remain higher in our view.

I don’t think Powell’s language will change at this meeting regarding inflation.  He’ll continue to insist it is transitory.  However, another month or two of inflation readings in the 5% range and the Fed will have to acknowledge the true of rising inflation…..

 

The most important chart to watch today is the US dollar.

The last few months have seen the dollar put in what may be a rounded bottom.  That is because of the taper talk.

Yet – the dollar did reverse last week at a key level and may want to turn lower.

The dollar is waiting on Powell – I suspect.

I believe Powell wants a weaker dollar.  Perhaps his comments at Jackson Hole will send a message to the dollar?

 

The larger view of the US dollar implies a much weaker dollar over time.  I believe the dollar will buckle as we continue fiscal spending and borrowing, and QE to finance the deficits.

 

You can see commodities have stalled as the dollar has rallied……

The broad commodity sector – one of our most favored investment asset classes looking out over the next 3-5 years – is now oversold as well and waiting on Powell’s comments…..

 

The big picture for the commodity sector shows  a breakout from the 10 year bear market decline.  Commodities relative to equities remain a value and should continue to benefit from inflationary pressures and a weaker dollar.

 

You can see energy is also pulling back after a strong rally – as the dollar rallies.

It too is oversold.

It too looks like it is waiting on Powell’s comments on the taper.

 

Gold has been correcting as well.

It’s important to understand that gold does not bottom like equity markets.  When stocks bottom, they often do so in a “V” shape.

Gold tends to form a rounded bottom.

Notice the green zones – when gold is oversold on the weekly charts.  (as it is very close to today)  That tends to be a point of reversal higher.

Gold remains a good inflation hedge, currency hedge, geopolitical hedge, and store of value.

 

The bigger picture of gold shows a large rounded bottom over the past 5 years.  It broke out last year, and has corrected since.

This is a large “cup and handle” formation – and tends to be quite bullish when complete.

 

Clearly Powell’s comments this week come at an important juncture for equities, the US dollar, and commodities.

We’ll keep an eye on the details and report back next week with the verdict…….

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Articles of Interest:

• Coronavirus:
  • CDC studies illustrate waning immunity among vaccinated Americans (Politico)
  • NIH Director predicts emergency use authorization of vaccines for children under 12 unlikely before late 2021 (Politico)
  • More companies issuing vaccination mandates after FDA approval of Pfizer shot (Washington Post)
  • US review of Covid’s China origin remain unclear and does not provide definitive conclusion (WSJ)
• Fed:
  • Goldman Sachs raises odds of November taper to 45% from 25%, sees Fed scaling back monthly purchases by $15B (Reuters)
• US economy:
  • Delta statistics, high-frequency data showing some positive signs for the economy (CNBC)
  • Lack of workers exacerbating supply chain issues and risk food shortages (Bloomberg)
• Washington/fiscal policy:
  • Democrats adopt $3.5T budget resolution, Pelosi agrees to infrastructure vote in late September (WSJ)
  • Draft legislation shows Democrats’ reconciliation bill would hit US companies with steeper penalties for shifting taxes abroad (Bloomberg)

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Charts of the day:

 

I thought the below chart was interesting.

No doubt – some sectors and assets are expensive.  We are seeing elevated valuations for US stocks, tech stocks, real estate, and bonds.

We see great value in commodities, some sectors like financials and energy, and perhaps in time international and emerging equities.

See the below with the US outperformance over the rest of the world…..pretty dramatic and implies the rest of the world may catch up at some point down the road….

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Quote of the day

“I can calculate the motion of heavenly bodies, but not the madness of people.” – Isaac Newton