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.   

by William Henderson, Vice President / Head of Investments
U.S. stocks finished last week in a quiet session that saw mixed results for the week.  The Dow Jones Industrial Average rose +0.9%, the S&P 500 Index rose +0.7% while the NASDAQ fell by -0.1%. Full year 2021 returns remain healthy across all three indexes. Year-to-date, the Dow Jones Industrial Average has returned +17.3%, the S&P 500 Index +20.0% and the NASDAQ +15.5%; representing a wide-ranging rally across industries and sectors. Bonds changed only slightly with the yield on the 10-year U.S. Treasury dropping two basis points to 1.28% from the previous week’s 1.30% and a full 46 basis points lower than the 1.74% yield level hit in March of this year (see chart below from the Federal Reserve Bank of St. Louis). Overall, low rates continue to fuel the economic recovery and give commercial banks a leg up by borrowing low and lending higher. 

The Q2 earnings season concluded with stronger than expected results from Dow Jones member Walt Disney while food delivery vendor DoorDash reported a wider than expected loss with added negative commentary. The results showed just what one would expect as the economy opens: more travel and leisure activities benefited Disney while greater restaurant openings and more diners hurt DoorDash. We may continue to see divergent trends in corporate earnings as companies react differently to the economic recovery. 

The late Donald Rumsfeld, former U.S. Secretary of Defense, used to speak of the “battlefield” in terms of “knowns and unknowns.” He understood we had terrorism in the world; it was a known largely in the form of bombings. For example: the 1983 U.S. Marine Corps barracks bombing in Beirut, Lebanon or 1993 World Trade Center bombing in New York City. Terrorism existed but it was generally “known” to be suicide bombings in the form of car and truck bombs. No one expected commercial airplanes to be hijacked and used as suicide weapons on September 11, 2001; and the result was the markets tanking. It was what Mr. Rumsfeld feared the most: “unknown, unknowns.”  The COVID-19 Pandemic was an “unknown” that no one was prepared for, and the markets rightly reacted by tanking again. Markets have experienced virus outbreaks before, including the bird flu, SARS, and Ebola to name a few; but COVID-19 was new and “unknown”that’s why they called it a novel coronavirus.   

Right now, we have a few things people are worried about, including inflation and resurgent COVID-19 in the form of the Delta variant.  So why are the markets still quietly rallying? Because these concerns are now “known”concerns, and we have the tools in place to fight them. If inflation reaches an average of 2%, along with falling unemployment, the Fed will raise interest rates. The existing vaccines for COVID-19 can protect from the Delta variant, we just need vaccination rates to keep increasing worldwide. We have talked about markets being efficient many times before, and now is a prime example. The markets see the eventual outcome and understand that concerns exist, but these concerns are “known” concerns and solutions exist to fix them. Efficient markets, a helpful Fed and a long-term investment outlook remain firmly in place.

Finally, look at the graph below (from The Federal Reserve of St. Louis) showing the U.S. Gross Domestic Product since 1950. It is truly amazing. Q2 2021 GDP hit a staggering $22.7 trillion and all but erased the pandemic-related recession of 2020.