Weekly Commentary: June 28, 2021
THE WEEK IN REVIEW: JUNE 20-26, 2021
Losing interest?
After a pretty violent little sell-off, the markets seemed to shrug off the possibility of interest rates rising sooner rather than later and hit new record highs on the back of a potential infrastructure agreement. Inflation worries also took a back seat as Federal Reserve Chairman Jerome Powell testified before Congress last week. His appearance followed comments the previous week from the Fed's James Bullard suggesting the Fed may have to raise rates much sooner than the "sometime in 2023" timeframe. Bullard's comments led to the market's worst week since October 2020.
Chairman Powell's testimony to the very sanctimonious sounding House Select Subcommittee on the Coronavirus Crisis stated that the Fed was doing "everything we can to support the economy for as long as it takes." He also said that we have a "long way to go" because the economy is not fully recovered and still requires the current levels of support from the Fed. He told the subcommittee that he expects strong job creation in the fall and continues to see inflationary pressures as "transitory." However, he described the idea of 5% inflation as "not acceptable."
Basically, the good chairman doused even the hint of a rate increase or any tapering of the Fed's bond buybacks in the next few months. It just goes to show how fragile the whole thing is: The minute someone walked into the party that even remotely looked like they might take away the Fed- provided punch bowl, the bureaucratic bouncers moved in and threw them out so the party can continue to interrupt us.
Where does that leave us? We are back to a TINA (there is no alternative) market. It seems stocks are the only game in town and will continue to be until the current status quo changes. Might that be inflation fears? Deeply paranoid markets seemed to lap up this whole "transitory" business. Here's my take: If prices go from $1 today to $2 in two months and then we only increase 2% a year from that point, are we cool with that? It fits the definition of "transitory." What Chairman Powell is saying, in my mind, is that we will put the screws to you for a short time (three to six months), then prices will go up significantly and remain there and things will level off. The problem is that once companies figure out they can continue to increase prices, they will keep doing so until there's not enough money to keep paying what they're charging. As I see it, that's something the Fed cannot control, so please spare us the "transitory" econo-speak. Prices are going up and wages are not going to keep up. As a result, the economy will likely stall at some point and the Fed – which will avoid raising rates as long as it can – will not have the tools to help stimulate a stumbling economy.
Is an infrastructure deal in sight? Maybe.
Last week's other big news was the much-anticipated meeting between a bipartisan group of senators and President Joe Biden in an attempt to hammer out an infrastructure package. The current version is about $1.2 trillion, down more than $1 trillion from the White House's initial ask of
$2.3 trillion and up about $700 billion from the Republicans' initial offer of $500 billion. I guess they finally agreed on a definition of what "infrastructure" is?
In either case, our roads, bridges, airports and ports all appear to need to be spruced up and brought up to date. It is hard not to support something that benefits all of us; I am particularly excited about the addition of broadband investment and internet access as part of the bill because it would connect more of the country and allow greater access to economic opportunity. However, I hope the money actually goes to projects that need to be built or fixed and that there are no other political shenanigans where money is diverted from physical infrastructure to programs that should probably be funded by other means through additional bills.
The good news is that the proposed corporate tax increases are not in the bill at this time and there will be no increase to the regressive federal gasoline tax. Purportedly, this bill will be funded through existing sources and will not involve additional borrowing. Some reports have cited the closing of the IRS tax gap as a potential funding source, the amount of taxes owed versus the amount of taxes collected, a figure estimated between $500 billion and $1 trillion. I doubt that the government can do this effectively since they can't even tell you how much it is, let alone try to collect. Good luck with that one.
The other fly in the ointment is that President Biden has stated this bill will not be signed unless Congress approves the administration's massive $6 trillion budget. It looks like all the non- infrastructure stuff that was in the original infrastructure bill has migrated to this humongous budget proposal. It also appears the Democrats are prepared to ram this through without Republican input or support via the reconciliation process. One way or another – whether through various stimulus bills or infrastructure plans – these additional expenditures were going to be enacted as part of the new administration's agenda. In my view, the additional and excessive spending is unnecessary and will damage the growth of our economy in the future, saddle future generations with even more debt and decrease our standard of living as we keep losing ground to China.
Coming this week
Jobs will be a major data point this week. The ADP jobs report will be announced on Wednesday; last month the report showed an increase of 978,000 jobs. On Friday, we expect the Bureau of Labor Statistics (BLS) employment situation report for June; in May we added 559,000 jobs. ADP has been pretty strong all along, but the government's report has been underwhelming the past few months and well below the expected 1+ million per month. We still have over 9 million job openings, so it wouldn't be surprising to get a jobs number close to 1 million. If it is significantly below that, we will need to start asking some serious questions about why jobs aren't coming back as strongly as they need to be.
Consumer confidence has been strong as we reopened the economy, but we need to see it stay consistently strong to maintain the pace of recovery. We'll see the consumer confidence report on Tuesday, which we should watch closely for signs of a slowdown.
Markets will slow significantly by Friday as we gear up for the holiday weekend.
Have a fantastic day!
Tom Siomades, CFA®
Chief Investment Officer
AE Wealth Management
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