Plain and simple; This was a wild week on Wall Street. There were so many ingredients that fueled the turbulent price action. Issues relating to the President’s European Tour, China, the possibility of a bipartisan Infrastructure Bill and the highly anticipated Fed meeting grabbed the headlines. There’s some serious stuff going on. Some matter more than others. There’s definitely no shortage of material to cover. I’m going to take these ingredients, try to explain their significance and mix them in like a Tossed Word Salad. Believe it or not, I tend to enjoy doing such things.
President Biden met with President Putin, in a highly anticipated summit. There wasn’t much in the way of expectations of any agreement. They both reportedly agreed to disagree on most subjects, but found common ground in a few. The only real agreement was to continue to have more dialogue. The return of each other’s Ambassadors is a start. Despite the optics of these 2 leaders on the Global Stage, the Market doesn’t really care. Russia has never been an economic power and its influence in the Digital Age is slim. It still has a 20th-century economy. Russia counts on its large Oil and Gas exports for its revenues, so the higher prices have been welcome news to the Kremlin. But Russia does not move the needle for the Market.
It’s the rivalry between the United States and China which garners the most Market attention. This is the rivalry of the Millennium in this Digital Age. Tensions continue to heat up around Taiwan, Trade, Technology and Intellectual Property. China was a primary topic at the G7 meetings last weekend. President Biden pushed for concrete steps to counter China’s rising influence. A global infrastructure project called “Build Back Better for the World” came out of the meeting. This is the West’s answer to China’s Belt and Road Initiative. The plan calls for spending $100 Billion per year to help developing nations’ climate change transitions, while sticking to climate standards and more fair labor practices. The goal is to create a higher quality alternative to Belt and Road, which has been criticized for its manipulative leverage for political gains, massive debt and a way to spread Beijing’s influence. The new G7 plan is also being referred to as “The Green Belt and Road” or the “Green Marshall Plan.” It would be funded by the World Bank and the International Monetary Fund, as well as the private sector. We shall see how this goes.
Now that President Biden’s European visit has concluded, it’s being reported that he will next seek to engage with Chinese President Xi Jinping in the coming months. A meeting of the 2 is not on the calendar, however both leaders will likely attend the G20 summit in October. They have plenty to talk about. On so many subjects, China and America also agree to disagree. But the future of global power and leadership is at stake. The Market will pay very close attention to that.
This week saw a new bipartisan proposal for a $1.2 Trillion Infrastructure Bill. It’s being reported that this plan has 21 moderate Senators in support. That includes 11 Republicans, enough to break a possible filibuster should all the Democrats vote together. However, it’s not clear that all Democrats will. The divide in Washington is not just between Republicans and Democrats. There’s serious divide within both parties. The Market doesn’t seem to pay much attention to the Washington political games until some serious negotiations take place. It might be the start of something, and both the Market and the American people would really like to see a more modern American infrastructure. It’s something to pay attention to.
For the Market, it’s all about the Fed. Ever since the Covid Crash, the Fed has provided unprecedented support to the Financial System. It hasn’t stopped. There was absolutely no change in monetary policy for the central bank. It kept the overnight rate near zero and will continue its existing $120 Billion monthly asset purchases. But the Fed Chair did say they’re ready to start talking about thinking about tapering its quantitative easing (QE). What has changed is seemingly Fed confidence in the sustainability of the recovery. The economic recovery is happening faster than the Fed had expected. The Market took this as a hawkish turn, which sent Treasury yields immediately higher, with Stock and Bond prices lower. The Dollar jumped higher too, hitting a 2 month high. But then, all that reversed. That’s where it got interesting.
About an hour after the Fed statement on Wednesday, interest rates started falling. Tech stocks started rallying. The Dollar spiked. The Market recalibrated its expectations. The Benchmark 10-Year Treasury yield fell back below 1.5%. That’s a very significant level. The yield curve flattened. Investors were buying the long end and selling the belly of the curve, primarily 5-Year Treasuries. The 30-Year Treasury nearly broke below 2%, a level last touched in February. Over the last 3 sessions, the spread between 5- and 30-year Treasury yields continued to tighten and is now below where it started the year. As a reminder, Bond prices rise when yields fall, and vice versa.
The Dow had its worst week since January while the Tech-heavy NAS fared quite well in comparison. That’s new. The NASDAQ 100 hit a new, all-time high yesterday. The S&P reached its high on Tuesday. The Dow hasn’t seen its high since early May. For much of the year, the crowds rushed into the reflationary trade. Many were Dow 30 stocks. They raced higher all Spring. They tipped the scale in May. This week they fled. They ran into beaten-down Tech stocks, the leaders of 2020. Rotation of leadership has been raucous and swift all year. Volume has picked up in June.
Asset prices have contracted. This, after some serious inflating in 2021. The US Economy is now expected to grow 7% this year, faster than the previous 6.5% modeled. The Federal Reserve recognizes it might have to raise rates earlier than expected to deal with a possible inflationary threat. Even though it stated a rate hike is still likely 2 years away, the sentiment has undercut the reflation trade that has been dominant since January. Besides, there is every reason to believe that some of the inflation is temporary and that the peak growth rates in recovery are now. The re-opening of America will only happen once. Adding to the volatile price action is today’s Quadruple Witching, which is when all 4 sets of options expire simultaneously. It generally leads to choppy trading. That was definitely at play this Friday.
As America re-opens, demand for goods and services is rebounding more quickly than the supply. And when demand outpaces supply, prices rise. Price still matters. The best cure for high prices is, well, high prices. Eventually, people stop paying up. For example, the price of Lumber has been cut in half from last month’s record high, as home remodel demand shows signs of weakening. Naturally, some builders might be waiting for lower prices. Also lower are Copper, Soybeans, Sugar and Corn. Like all heavy objects, they fell faster than they climbed.
But here’s the deal: The Fed has made it clear, time and time again, they are focused on outcomes not outlooks. They want to see the whites of the eyes of sustainable inflation. They want to see hard data as evidence. It plans to be patient. It will take weeks, even months, until they act. You see, the Fed has far more tools to deal with inflation than deflation. It doesn’t really have many effective tools to deal with deflation. It has struggled for 2 decades to get pricing power higher. Fed Chair Powell said the Fed won’t hesitate to use its tools to address inflation moving up in a way that’s “really materially above” its goals. The Fed Chair also said, “It turns out it’s a heck of a lot easier to create demand than it is to, you know, to bring supply back up to snuff.”
Another important point: The Fed accomplished so much this week without doing a thing. The stock sell-off and commodity price collapse from way overheated levels is incredibly healthy. The price of food just went on sale. The Fed effectively talked things down. It must be very pleased to see the froth taken out. The Bond Market seems to be in agreement with the Fed, that these inflationary pressures are not sustainable and long-lasting.
President Biden signed a bill on Thursday to make Juneteenth a national holiday after the measure passed the Senate unanimously and was approved 415-14 in the House. The day commemorates the 1865 date when Union General Gordon Granger arrived with federal troops in Galveston, Texas, and issued an order freeing the last of America’s slaves. At the signing ceremony at the White House, President Biden said, “Great nations don’t ignore their most painful moments. They embrace them.” Most Federal employees had today off. Most companies around the country, including the U.S. Stock and Bond Markets, remained open today due to the advanced notice needed to coordinate holiday closures. Both the Stock Market and the Bond Market are expected to be closed in honor of Juneteenth next year.
Something else happened this week, which got lost in the headlines but has significance. There is a new head of the Federal Trade Commission. Her name is Lina Khan. At just age 32, she is the youngest commissioner ever confirmed to the FTC. Perhaps most importantly, Khan is considered a Progressive Tech critic. She is not popular in Silicon Valley and is expected to be tough on the Tech Titans.
Khan’s 69-28 approval in the Senate reflects bipartisan agreement on Capitol Hill that Big Tech needs some tighter reins. Khan is a Law Professor at Columbia University, specializing in antitrust and anti-monopoly cases. She previously worked as a legal adviser to the former FTC Commissioner. Khan argues that current anti-competition laws are outdated and need modernizing to deal with e-commerce. “Congress created the FTC to safeguard fair competition and protect consumers, workers, and honest businesses from unfair & deceptive practices,” Khan said. “I look forward to upholding this mission with vigor and serving the American public.”
This is not a new issue and the Market is very aware. The Tech Titans have monopolistic characteristics. But price gouging is not one of them. And their customers love them. But there’s a new sheriff in town. Amazon, Google and Facebook are on watch. Their stocks seem unfazed. Tech caught a bid this week and is showing signs of renewed strength. That’s an investment theme.
Volatile price action has been the norm in this young decade of the 2020s. With a double-digit gain already in the first half of the year, much has been priced forward. A healthy correction is overdue. There has been plenty of corrective price action below the surface, but the S&P 500 has remained elevated, hitting fresh all-time highs earlier in the week. Historically, the Stock Market experiences a 10% correction on average once per year. Not so this year. There has not been even a 5% correction since last October. Is this the beginning of one? Maybe. It would be perfectly normal, and quite healthy for another re-set. You just never know when. The probability is quite high for it to occur in H2. We will be ready.
Have a nice weekend. We’ll be back, dark and early on Monday. Happy Father’s Day to all you fellow Dads!
Happy Father’s Day!
From all of us here at Bedell Frazier, we want to wish a very Happy Father’s Day to all you Dads. Thank you for everything you do.