by William Henderson, Vice President / Head of Investments
Fed Chairman Jay Powell gave the markets what they expected during his virtual Jackson Hole speech. He offered calming words around the effect of modest tapering of bond purchases by year-end and no rate hikes until unemployment is at or near the 4.5% target and average inflation hits 2%. Those few words gave solace to the markets and we saw a nice rally at the end of the week. Last week, the Dow Jones Industrial Average gained +1%, the S&P 500 Index gained +1.5% and the tech-heavy NASDAQ gained a juicy +2.8%. Strong weekly gains added to already strong year-to-date gains, shaping 2021 into quite a year for stock market returns. Year-to-date, the Dow Jones Industrial Average has returned +17.3%, the S&P 500 Index +21.2% and the NASDAQ +17.9%. The Fed’s dovish tone during Powell’s speech kept Treasury Bonds from drastically selling off on the bond tapering news. The yield on the 10-year U.S. Treasury rose five basis points to 1.31% from 1.26% the previous week. The current rate is 43 basis points lower than the 1.74% yield level hit in March of this year. 

Low Treasury Bond yields impact corporate borrowing levels and mortgage rates, both of which have positive implications on the overall economy. Corporations can borrow at historically low levels and low mortgage rates also continue to boost the U.S. housing market. (See the two charts below, both from the Federal Reserve Bank of St. Louis). The first chart shows the 30-year fixed rate mortgage average in the United States and the second, by Moody’s, shows corporate bond yields relative to the 10-year Treasury (commonly called the “spread” to treasuries). Both charts are at or near record low levels. 

Several issues remain solidly behind the markets and the economy. First, as we have shown many times, the consumer is flush with cash (from stimulus money, decreased spending over the past year and increased savings). Second, the banking system is in great shape to fuel an already expanding economy. Two charts by Cornerstone Macro show U.S. banks willingness to make consumer loans and Commercial and Industrial Loans (C&I) at or near record levels in both cases. Low rates and banks’ strong willingness to lend make a good partnership. 

And third, as mentioned above, Treasury yields remain low, allowing mortgage rates to stay low and corporations to borrow at near record low levels. All three issues point to the continuation of a healthy growing economy and a strong finish to 2021.   

It would not be prudent to speak only in terms of positive indicators. Truthfully, each week we scour the headlines searching for headwinds and pockets of negativity. Concerns about unrest in Afghanistan and elsewhere across the globe, supply chain disruptions, and uncertainty around COVID-19 variants seem to always be bubbling just under the surface. Remember, every healthy bull market has frequent selloffs (sometimes by 5% or more), so it is important to realize that markets go down and markets go up; we just hope that in the end, there are more ups than downs. Like a broken record going around a turntable (are we dating ourselves?), we repeat: a long-term outlook and sound financial plan is a solid recipe for success. Pay attention to what’s behind the growth story and the solid economic foundation the Fed has built. 

by William Henderson, Vice President / Head of Investments
U.S. stocks finished last week modestly down across the board. The Dow Jones Industrial Average fell -1.1%, the S&P 500 Index lost -0.6%, and the NASDAQ fell by -0.7%. The modest losses for the week did not take much from full year 2021 returns, which remain healthy across all three indexes. Year-to-date, the Dow Jones Industrial Average has returned +16.1%, the S&P 500 Index +19.4% and the NASDAQ +14.7%. Treasury bonds changed very little last week with the yield on the 10-year U.S. Treasury dropping two basis points to 1.26% from 1.28% the previous week. 1.26% on the 10-year U.S. Treasury is a full 48 basis points lower than the 1.74% yield level hit in March of this year. Further, traders and equity markets certainly were caught off guard last week when the FOMC meeting minutes were released and showed that the Central Bank was considering a “tapering” of bond purchases. This had to have been an “Emperor Has No Clothes” moment as the worst kept secret on Wall Street was revealed. Everyone, everywhere expects the Fed to taper its bond purchases, so why did the markets sell off?   

As we planned this week’s market commentary, it was agreed that we would not follow the herd and mention the “Taper Tantrum of 2013,” however, it seems we failed. This event refers to the 2013 modest sell off in bonds resulting from the Fed announcement that it would finally reduce bond purchases it had been making since 2008 because of the Great Financial Crisis. Looking at the chart below from the Federal Reserve Bank of St. Louis, the “event” of 2013 looks more like a buying opportunity in bonds rather than a blood bath for bond traders as the 10-year U.S. Treasury hit 3.04% at the end of 2013.
 

The point is that everyone knew in 2013 that the Fed needed to slow its bond purchases and allow the markets to return to somewhat normal trading patterns. Just like 2021 – everyone knows the Fed must slow its purchases. So, again, why did the markets sell off on last week’s news from the Fed meeting minutes? The markets are most likely seeing the gradual end to the massive monetary stimulus that the Fed has provided since March of 2020 and that simply removes a comfortable layer of protection and adds an unsettling layer of uncertainty. 

There are two opposing thoughts: First, actions by the Fed to reduce its bond purchases thereby starting to remove monetary stimulus, shows the economy is well on its way to a solid recovery. This is healthy news and should eventually result in strong market performance. Second and more worrisome was the Fed’s last-minute change to its annual symposium in Jackson Hole, Wyoming, to a virtual event rather than the previously planned in person event. The Fed’s decision to cancel this live event is certainly indicative of wider implications from the spiking in cases of delta-variant of COVID-19 and signs of overall weakness in economic activity. Data released from the Transportation Security Administration last Friday showed a slowdown in travel, with the number of people passing through TSA checkpoints down 10% from a mid-July high. In our opinion, one could certainly brush off this drop in travel as typical of the summer travel season ending and the “back to school” season starting. Either way, it is information and activity that the market must digest and then react to in one way or another. 

Just like we need things to write about each week, so do the business news channels needs things to talk about every day all day. Economic noise and information are widely available and overly celebrated. We like to focus on long-term trends like the 50-year growing GDP of the United States, favorable demographic trends in the U.S. compared to other developed countries, and finally, long-term performance of stock and bond markets. Keep focused on your investment and ignore the noise.