Broker Check

Taper Talk Rattles Stocks

June 22, 2021
Share |

Taper Talk Rattles Stocks

  • U.S. equities log their worst week since February on Fed policy concerns.

  • The Fed seems to have pivoted from its stance that inflation will be transitory.

  • In uncertain times, diversification remains the best investment strategy.

Last week, U.S. equities were lower with the S&P 500 logging its worst week since February after a 1.3% decline on Friday. Equity markets struggled as investors continued to digest the more hawkish-than-expected Federal Open Market Committee (FOMC) meeting and the Federal Reserve (Fed) dot plot that suggested two potential interest rate hikes in 2023. When we laid out our 2021 primary investment themes, we noted mounting risks would be a concern as the economy transitions from an early-cycle to mid-cycle recovery. One specific risk we highlighted is potential inflation and the Fed being too optimistic about its transitory nature. We feel last week was a clear sign that both the Fed and financial markets might be wrong.

When the pandemic-induced recession started last March, the Fed began an unprecedented stimulus package that included cutting interest rates to near zero and implementing a $120B per month treasuries and mortgage-backed securities purchase program. The Fed implemented both policies to help stimulate the economy by keeping borrowing costs low. Despite a recent jump in inflation, Fed members indicated that it would be transitory and therefore not likely to lead to a need to either raise interest rates or reduce these purchases, known as tapering, to reduce price pressures anytime soon. In fact, in early June, New York Fed President John Williams, the usual voice of the Fed consensus
perspective, stated “we’re still quite a ways off” from tapering. Unfortunately, at this past week’s FOMC meeting, where interest rate policy is primarily set, the new edition of the Fed's Summary of Economic Projections (SEP) and Fed Chairman Jerome Powell's commentary indicating a potential path toward tapering raised investor concerns. These seemed to be an about-face from Fed statements just a couple of weeks earlier and increased worries that maybe the Fed has underestimated the transitory nature of it. The icing on the cake occurred on Friday when St. Louis Fed President James Bullard seemed to indicate that inflation is more than policymakers expected, making an interest rate hike necessary by late 2022. Friday’s selloff was sharp with all 11 S&P 500 sectors lower on the day.

In general, inflation worries investors. Bond investors demand higher yields to compensate them for inflation’s effect on purchasing power. This impacts equities because higher borrowing costs from rising yields make corporate debt more expensive. Couple higher borrowing costs with widespread shortages of components, materials and freight services along with wage growth at 20-year highs, rising inflation is an important market concern. The Fed knows this and uses interest rate policy to raise interest rates to combat it. However, as we have noted in past commentaries, we continue to see evidence that inflation may not be as transitory as the Fed anticipates and policymakers may need to be a bit more aggressive in their tapering. Though the Fed did not officially announce any tapering plans in their FOMC meeting last week, this may change sooner than later. Our best estimate is that policymakers will provide some sort of warning at their annual Jackson Hole symposium in late August or their September meeting when they next update their dot plots. If inflation continues to prove less transitory than anticipated, expect official tapering to begin early in 2022. Financial markets seem to be geared toward this scenario as we saw a sharp selloff in economically sensitive commodities, a strengthening U.S. dollar, and a flattening yield curve on Friday. All three of these indicate that investors expect a possible shift to a more hawkish interest rate policy than was anticipated. 

Equities had a tough week and we anticipate more volatility in the near-term. Any disruption to current expectations could be a headwind to stocks, and stock market valuations priced to perfection could amplify this volatility. We may see a stock market correction at some point this year, but we still don’t expect a big selloff like we saw last spring. 

We maintain that diversification is the key in this market. In these times, your financial professional can help you stay
focused on your long-term risk and return goals and help you with your personalized investment objectives.

____________________________________________________________________________

This report is created by Cetera Investment Management LLC. For more insights and information from the team, follow @CeteraIM on Twitter.

About Cetera® Investment Management
Cetera Investment Management LLC is an SEC registered investment adviser owned by Cetera Financial Group®. Cetera Investment Management provides market perspectives, portfolio guidance, model management, and other investment advice to its affiliated broker-dealers, dually registered broker-dealers and registered investment advisers. 

About Cetera Financial Group
“Cetera Financial Group” refers to the network of independent retail firms encompassing, among others, Cetera Advisors LLC, Cetera Advisor Networks LLC, Cetera Investment Services LLC (marketed as Cetera Financial Institutions or Cetera Investors), Cetera Financial Specialists LLC, and First Allied Securities, Inc. All firms are members FINRA / SIPC. Located at 200 N. Pacific Coast Highway, Suite 1200 El Segundo, CA 90245-5670


Disclosures
Individuals affiliated with Cetera firms are either Registered Representatives who offer only brokerage services and receive transaction-based compensation (commissions), Investment Adviser Representatives who offer only investment advisory services and receive fees based on assets, or both Registered Representatives and Investment Adviser Representatives, who can offer both types of services. The material contained in this document was authored by and is the property of Cetera Investment Management LLC. Cetera Investment Management provides investment management and advisory services to a number of programs sponsored by affiliated and non-affiliated registered investment advisers.

Your registered representative or investment adviser representative is not registered with Cetera Investment Management and did not take part in the creation of this material. He or she may not be able to offer Cetera Investment Management portfolio management services. Nothing in this presentation should be construed as offering or disseminating specific investment, tax, or legal advice to any individual without the benefit of direct and specific consultation with an investment adviser representative authorized to offer Cetera Investment Management services. Information contained herein shall not constitute an offer or a solicitation of any services.

Past performance is not a guarantee of future results. For more information about Cetera Investment Management, please reference the Cetera Investment Management LLC Form ADV disclosure brochure and the disclosure brochure for the registered investment adviser your adviser is registered with. Please consult with your adviser for his or her specific firm registrations and programs available. No independent analysis has been performed and the material should not be construed as investment advice. Investment decisions should not be based on this material since the information contained here is a singular update, and prudent investment decisions require the analysis of a much broader collection of facts and context.

All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The opinions expressed are as of the date published and may change without notice. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision. All economic and performance information is historical and not indicative of future results. The market indices discussed are not actively managed. Investors cannot directly invest in unmanaged indices. Please consult your financial advisor for more information. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards. A diversified portfolio does not assure a profit or protect against loss in a declining market.