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May 21, 2021 – After a 3-week hiatus, buyers came rushing back to the markets. Technology stocks rebounded the most, coinciding with a slight reversal in interest rates. Taper talk is coming, and we examine what that means for markets from here.

//  by Tower Bridge Advisors

After three straight days of losses in the overall market, bargain hunters stepped up to the plate yesterday with technology stocks leading the charge higher. The Nasdaq bounced back 1.8%, pointing towards hope of at least a short-term bottom after another mini-correction. The Dow closed up 0.5% and the Russell 2000 Small Cap Index gained 0.7%. At their low points during this 3-week pullback, the S&P and Dow Jones indexes failed to even reach a full 5% correction, while the Nasdaq dropped 8.5% before recovering. The S&P has not seen a 5% drop in 135 trading days, which is the 17th longest streak on record.

Federal Reserve meeting minutes finally showed a start to talking about talking about a tapering phase. Not to be confused with actually talking about it…or finally tapering the $120B monthly bond purchases, which all happens before we even talk about talking about raising Fed Funds. A few participants suggested that if these rebounding economic conditions continue to advance, “it might be appropriate at some point, in upcoming meetings, to begin discussing a plan for adjusting the pace of asset purchases.”

It is almost comical that we are continuing to expand Government balance sheets at this size when the economy is growing at double digit rates, but here we are. Note, the Fed didn’t say ending the bond purchases. It will come in phases, maybe dropping purchases to only $60B a month first. Fed heads do not want to stop this growth early, or anywhere near close to early.

Tapering will happen, most likely in early 2022 unless inflation extends past the summer months and it forces their hands earlier. Everyone expects supply chain disruptions, reopening efforts, cash-rich consumers and pent-up demand which exceeds supplies today. Transitory conditions, as they put it, should end soon thereafter. Therein lies the million dollar question of when.

Back in 2013, Taper Tantrum became a common phrase after Ben Bernanke announced that the Fed would, at some future date, reduce the volume of its bond purchases that started in 2008. The Fed didn’t stop their purchases at all in 2013. In fact, they increased them two years later. In a span of less than two months, when Bernanke openly discussed the possibility of slowing bond purchases, the S&P dropped nearly 8% and rates rose over 100bps from 1.61% to 2.66%. From that point, the S&P rose 35% in just two years. Two steps forward, one step back. That is how normal markets work, climbing a wall of worry. Tapering or tightening cycles are not times to sell everything and move to cash. Quite the opposite actually, especially today with a Federal Reserve willing to let things run hotter for longer. Anything they do will be slow-paced. An immediate reaction to sell stocks, historically, has proven to be the wrong move.

Let’s take a look at previous tightening cycles, which historically are times of Fed rate hikes:

Nearly every case was met with initial selling of equities for several weeks. Nearly every case also resulted in sizable gains afterwards. 2013 is not listed as the Fed didn’t do anything other than talk about tapering. It is still the best year for the S&P 500 in this century, even with the 8% drop noted above. Market timing is difficult and not recommended. Tapering phases bring a fresh bout of fear into the market and are opportune times to reposition for another leg higher, not go to cash. However, moving from early cycle leaders to mid or late cycle stocks is entirely prudent.

At some point, the Fed may be caught behind the curve from an inflation and risk-taking standpoint. However, containing inflation is a lot easier than ending deflation. Japan is a perfect case study. Numerous Government-sponsored plans did nothing to end the deflationary spiral over the past three decades. Stocks have languished along with their economy. We want to avoid deflation at all, or almost all, costs.

Extremely robust CPI numbers for April, more expected in May and June along with spiking earnings and supply shortages, are all leading markets to look towards tapering sooner rather than later, regardless of Fed speak. Futures markets are pricing in one rate hike next year, well before the Fed’s 2024 timeline. In just the past 2 weeks, 10 year yields jumped 24bps to touch 1.70% again.

Even though higher yields pressure go-go growth and long duration assets, higher quality stocks are holding their own. I was surprised when running the numbers, but FANGMAN is actually up 8%+ this year, similar to the S&P 500’s 11% return. Pressure in the market remains on the fringes and less so on fairly valued, higher quality stocks.

As long as earnings keep expanding, there is no reason to think that will stop. However, a correction can, and should, happen at any time. History says that will come when taper talk increases. Over the coming weeks great news can be taken as bad. By this I mean anything that shows strength over and above expectations will pull forward fiscal tightening. In a weird way, a stronger economy today could be the impetus for profit taking tomorrow. As noted, this is just another chance to reposition portfolios for the next leg higher.

The infamous Mr. T turns 69 today.

James Vogt, 610-260-2214

Tower Bridge Advisors manages over $1.3 Billion for individuals, families and select institutions with $1 Million or more of investable assets. We build portfolios of individual securities customized for each client's specific goals and objectives. Contact Nick Filippo (610-260-2222, nfilippo@towerbridgeadvisors.com) to learn more or to set up a complimentary portfolio review.

# – This security is owned by the author of this report or accounts under his management at Tower Bridge Advisors.

Additional information on companies in this report is available on request. This report is not a complete analysis of every material fact representing company, industry or security mentioned herein. This firm or its officers, stockholders, employees and clients, in the normal course of business, may have or acquire a position including options, if any, in the securities mentioned. This communication shall not be deemed to constitute an offer, or solicitation on our part with respect to the sale or purchase of any securities. The information above has been obtained from sources believed reliable, but is not necessarily complete and is not guaranteed. This report is prepared for general information only. It does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed in this report and should understand that statements regarding future prospects may not be realized. Opinions are subject to change without notice.

Filed Under: Market Commentary

Previous Post: « February 22, 2021 – The biggest factor this morning is the ongoing rise in 10-year bond yields. Higher yields mean lower P/Es for stocks. They impact growth stocks more than value names. As the economy recovers in a rising rate environment, watch for better relative performance from value sectors and a sharp headwind to excessive speculative activity.
Next Post: June 18, 2021-Fed announcements usually take a few days before the market figures out what they really said. This time is no different as rates initially spiked but made a 180 degree turn yesterday. Winners and losers in the stock market also flip-flopped. What to do now? »

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  • August 25, 2025 – The Fed’s shift in policy, as stated by Jerome Powell last Friday, moves away from a focus on inflation and more toward insuring full employment. Such a shift suggests more short-term rate cuts and a willingness to tolerate some inflation as long as it stays below 3%. A willingness to tolerate a bit more inflation may sound innocuous but it could lead to unanchored long-term inflation expectations and keep 10-year Treasury yields elevated. If so, the euphoria expressed in Friday’s market rally may have been a bit too exuberant.
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