September 2021 - On the way to a peaceful tapering
August was mostly positive for risk assets of major developed countries with lower volatility in the background. On the other hand, safe assets such as investment grade bonds, were trading lower, with the benchmark 10-year Treasury yield starting the month below 1.20% and ending it above 1.30%.
Despite the fast spreading of the Delta variant and the vaccines’ declining efficiency against infection, global data continues to reflect optimism: consumption spending remains high, and we are witnessing a shift from goods to services lately. Two signals confirming that the recovery is on the right path. Also, since the Pfizer/BioNTech Covid-19 vaccine received FDA’s full approval, reopening is expected to accelerate further.
Two huge plans advanced in the US Congress during the summer: the infrastructure bill of $1 trillion, the largest federal investment into infrastructure projects ever made, and the reconciliation bill of $3.5 trillion, which is a social plan that Democrats will try to pass without Republicans’ support. This huge federal cash deployment will be highly supportive to sectors such as infrastructure, electric vehicles, cybersecurity and 5G.
Last week, the Jackson Hole Symposium, the annual Fed members summit in Wyoming, was held virtually, for the second consecutive year. This meeting focused on inflation and unemployment. After Chairman Jerome Powell stated that the economic recovery from the pandemic has exceeded expectations, he confirmed that the time has come to tighten the Fed’s purchase program. Therefore, tapering is now highly likely before the end of the year, while a rate hike is still not expected before 2023.
According to Powell’s statement, the supply chain disruptions (shortages and bottlenecks) alongside wage increases are still the main source of inflation. The spike in some prices is impacting only goods and services affected by the pandemic yet, and this trend tends to disappear with time (for example used cars prices). As for wages, the increase is welcome because it supports a rising standard of living, and it is still consistent with the long-term inflation target.
After the summer break, September will see the return of Central Banks’ meetings. From the Fed we expect more details regarding the upcoming tapering: when exactly, what, how much etc. Of course, a huge focus will be put on the August jobs report, that needs to confirm the “substantial progress” made in the labor market in July. September will also mark the end of the enhanced unemployment benefits from Covid-19, and so we may well have a wave of people returning to work in the US. The ECB’s meeting may be focused on inflation, since the last data released this week showed an unexpected 3% inflation rate in Eurozone, the highest level since 2011.
News from China was less dramatic this month, but the momentum has not yet returned to Chinese stocks. Some investors are starting to think that the new regulatory measures are now coming to an end, but the vast majority still await concrete positive moves in order to build back a bullish sentiment and bring capital back to the world’s second largest economy.
In terms of earnings, it was another strong quarter: 87% of S&P 500 companies reported positive surprises for EPS (earnings per share) and revenue. However, in terms of future guidance, it was split: about half the companies warned of slowing growth for the coming quarters but that’s to be expected after the boom experienced in some sectors during the pandemic.
While closing a seventh straight winning month, it’s hard to remain in the skeptical zone. Also, since the Fed remains very transparent and tapering has been highly predictable for quite some time now, we don’t expect any “tapering tantrum”, as we experienced in 2013. We continue to see stocks more appealing than bonds, and the fact that major financial institutions recently increased their target for US equity indexes comforts us in our overweighting choice.
As always, risk-management combined with rigorous sector and geographical diversification will remain key factors for investment performance.
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