Weekly Commentary: June 21, 2021
The Week in Review: June 13 - 19, 2021
Talking about talking?
The market stumbled after the two-day Federal Reserve meeting last week, after Chairman Jerome Powell used the phrase "talking about talking about" to describe the Fed's attitude toward increasing rates sooner rather than later. Chairman Powell also said the Fed would consider raising interest rates twice by the end of 2023. That's pretty soft and inexact language in my opinion, but it is a shift from the no rate increase "for the foreseeable future" line the Fed has used over the past few years.
Some Fed governors have signaled that a rate increase may be needed much sooner, and I agree with that assessment. Driving the change were likely things we've discussed often in prior commentaries, most notably fears of inflation and an overheated economy. There is no way the Fed can sit by for over a year and a half if we continue along the current path. The former (inflation) is already upon us and the latter (an overheated economy) may be here by this summer.
It's been 10 years since we heard serious talk of rising interest rates. The last time the Fed tried to raise rates was in the fourth quarter of 2018; the market didn't like it and the activity was short-lived with the Fed reversing course, but the resulting damage was quick and painful. The "taper tantrum" of 2013 was met with an equally negative response and the Fed backed off. There is no reason to believe that the results will not be the same once markets acknowledge and accept that the Fed will move.
The challenge? The Fed needs to negotiate the process in a methodical manner that makes sense to investors and doesn't have even the slightest hint of panic. As I have discussed before, interest rates can typically increase in two ways: Fed action or market forces. It seems the markets so far have ignored or discounted any rate increases and the Fed has done everything but handstands and cartwheels to keep rates at these ridiculously low levels for this long. So far, the market has moved the longer end of the curve upward, but it hasn't been sustained because the market doesn't see more than a few weeks ahead.
Right now, in my mind, the Fed is pretty much at the end of its rope and the market knows it. Unless the Fed puts out a forceful and logical plan – and sticks to it – the markets will not take the pronouncements seriously once again. The Fed has consistently said these inflationary forces are "transitory." However, unless you define transitory as a week (and the Fed doesn't), the pressure will be immense for the Fed to act sooner rather than later.
We are beyond the point where the Fed has many choices. In my view, we're down to one choice, tightening, which can take the form of unwinding some of the purchases they are making and then actual rate hikes. It's not an option for the Fed to ride this out, since failure to act will only force the Fed to take more stringent measures later while also losing credibility. They might as well act and retain credibility rather than fail on both counts.
Hack summit?
The other big news last week was the much-anticipated meeting between U.S. President Joe Biden and Russian President Vladimir Putin. The meeting came on the heels of some high-profile cyberattacks on our infrastructure, including a partial takedown of our gasoline and beef distribution systems. Not much happened at the summit; we mostly saw some flowery language and a list from President Biden to President Putin outlining 16 areas of infrastructure that were "off limits."
How about everything in our country is off limits? And if the Russian government isn't involved in these attacks, how about coming up with an agreement to combat illegal cyber threats jointly and cooperatively between our two countries? Now that would be a summit worth mentioning.
Interestingly to me, neither election interference nor our educational system was part of the 16 critical areas mentioned. As I see it, without any agreements along those lines, we have a dictator with an economy similar to the size of New York state on the world stage with the leader of the free world. My question is: Who gets more out of that? The Russians are less and less a global player and are being relegated to regional status. That's usually a good thing, since they cannot bother everyone all around the world. But given our ever-increasing digital economy, they could create havoc worldwide and if there are no consequences, they could potentially make our daily lives very uncomfortable. You don't need a huge standing army to wage a global war anymore.
Coming this week
It's likely markets will still be processing the latest Fed meeting as we start summer. Vacations will be in full swing (and probably on steroids) now that everything has reopened.
We will get a continued reading into the red-hot housing market with existing home sales on Tuesday and mortgage applications and new home sales on Wednesday.
The third and final reading of Q1 2021 GDP will be announced Thursday. The first two readings held at +6.4% and expectations are for no changes.
More inflation-related data will be on display Thursday, including retail and wholesale inventories. Expectations are that inventories will remain tight.
Consumer sentiment and spending on Friday are expected to be strong.
Have a great week!
Tom Siomades, CFA®
Chief Investment Officer
AE Wealth Management
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