Stocks rose to new highs Friday culminating in a four-day rally after last Monday’s sharp losses related to rising Covid-19 related fears. Earnings season has been generally on target with extraordinary year-over-year gains compared to last year’s second quarter when much of the country was in lockdown. The 10-year Treasury yield remains low at about 1.3%.
As we have been noting, as long as the Fed keeps buying $120 billion in bonds each month, and as long as the Treasury keeps the money supply growing at double digit rates, there is support for asset prices almost regardless of the economic news. Stocks, bonds, homes, art and, yes, Bitcoin are all backstopped by the power of these asset purchases. In each case, it is simply a function of more demand than supply. Of course, that is starting to leak over into consumer prices as a strong post-pandemic recovery takes place. While the Delta variant of Covid-19 is concerning from a healthcare point of view, so far it is having little economic impact. To be sure, hospitalizations are up, but 99% of the hospitalizations are occurring among those who chose not to be vaccinated. For the most part, they choose to take the risks and consequences of infection while leading normal daily lives. Thus, while the disease may be just as much a threat as it was a year ago, the economic impact is far different. Half our population is fully vaccinated. Their threats are reduced substantially. The other half either have been infected or appear willing to face the consequences if they do catch the diseases. Governments may, in some places, go so far as to reinstitute mask wearing, but at least so far, no one is suggesting any actions liable to stifle economic activity.
That doesn’t mean the impact will be zero. There will be some who defer flying or skip crowded indoor venues until this latest surge ends. Each surge has been less harmful economically than previous ones, at least in the U.S., and I expect the same will happen this time.
The big economic event this week will be the FOMC meeting. The Fed is likely to maintain a very dovish stance, acknowledge some concern relative to inflation and maybe set a road map that will lead to its first tapering of bond purchases around the end of this year. However, details as to the exact start or the pace of purchase reductions probably will have to wait at least another meeting. In a world awash with money, our economy hardly needs more stimulation. The Fed has said numerous times that it will wait for inflation to sustain itself at an above average rate before moving, and it wants to keep interest rates as low as possible for as long as possible. We have discussed the possible unintended consequences of being too accommodative many times in the past. However, for now, markets will focus on the size and pace of tapering. For now, investors are willing to accept the notion that there will be downward pressure on interest rates for a sustained period while the Fed exits the market extremely slowly. That doesn’t mean rates can’t rise or someday return to a level that gives bond investors a positive real return, but the road map to get there suggests that it will take a long time. The fly in the ointment could be hotter than expected sustained rates of inflation. Some of the recent price spikes in commodities have already rolled over, but not all. Oil remains near $70. Home prices keep rising at solid double-digit rates even as some of the frenzied behavior calms down. Rents are only starting to rise, and wages are on the upswing as well. If there is one factor that will end the bull market near term, it would likely relate to inflation running too hot for too long.
One of the biggest moves this morning is the double digit rise in the value of Bitcoin and related cryptocurrencies after Amazon# suggested it was considering accepting Bitcoin for payment. It said further, it is exploring establishing its own token for use by its customers as early as sometime next year. While the word Bitcoin suggests it is an alternative money, it’s primary use as a currency to date has been for illegal drugs and money laundering. It has also been an alternative for nations with runaway inflation and unstable currencies. Most purchases, by far, have been by investors or speculators buying and holding Bitcoin in hopes of selling it at higher prices. While Amazon may gain some PR attention suggesting that it will accept crypto currencies for transactions, there is no obvious advantage to either the consumer or Amazon from any crypto transactions. Ultimately, as in the case of Tesla, its goods will be priced in dollars or local currency. Transactions using Bitcoin won’t be completed any quicker. Delivery times will be the same. Perhaps I am naïve but any serious crypto currency that is truly transactional versus speculative will have to be stable, traceable, and regulated in some fashion. Few of us want our wallets to grow or shrink 10% overnight simply because of a tweet or unexpected headline.
Getting back to the economy, if there is one common theme today, it would seem to be if it is popular, it’s in short supply. Car dealer lots are empty. New cars are sold before they reach the dealer lots. Homebuilders have new homes on allocation. New golf club sets can take six weeks to deliver. Savvy buyers should think about doing Christmas shopping in October. Some of these shortages are clearing but most are clearing slowly. They are also having an overall economic impact. Costs are rising. Transportation costs and trucking costs are spiking as truckers can’t get drivers. With schools about to reopen, there is a shortage of teachers. Walk along a seaside boardwalk and look at the number of businesses begging for help. Many have had to shorten hours. Restaurants are forced to be takeout only. Used car prices are rising 10% per month in some cases.
Not everything is in short supply. Movie theatres are closing. Restaurants that focus on breakfast and lunch in central business districts are dying. So are parking lots. The pandemic accelerated change. What was hot is now even hotter. What was fading now is dying.
It is important to look at your portfolio and make sure your account isn’t filled with yesterday’s superstars. Department stores aren’t about to make a comeback. On the other hand, some businesses that surged while we were all locked up may not have as bright a future when everything reopens. Will we continue to buy Peloton bikes at the same pace once we are comfortable going back to the gym? Or is the Peloton more fun and more efficient than gym visits? I don’t have the answer, but the question is the right one.
It’s been a quiet weekend. This week will be the biggest week for earnings. Then comes August, normally peak vacation season, and slow economic season once we get past the big burst of data in the first week. Later in August, Fed officials gather at Jackson Hole. There should be few surprises. The Senate this week could pass an infrastructure bill, but the House won’t take it up until the fall and its future is problematic. The Democrats could shed more light as to how they intend to pay for almost $5 trillion in added spending (including the infrastructure bill). The wish list will be scary to the investor class, but there is a long way to go before anything passes. The $5 trillion spend could well be cut in half before passage (if, indeed, anything passes) and the accompanying tax requests will likely get toned down as well. If taxes do rise, particularly corporate taxes, their impact on future earnings are not yet baked in. That will become a primary focus in the fall.
Today, Sandra Bullock is 57. Helen Mirren is 76. Mick Jagger turns 78.
James M. Meyer, CFA 610-260-2220