The Thunder Rolls
Even though it has been an unusually dry summer across the country, we still have experienced a few thunderstorms or can at least remember thunderstorms of past summers. Some can be calm with the thunder being a low rumble in the distance and others can be violent with loud thunder and sizzling lightning. The magnitude of impact certain events have on the market is comparable to the intensity of a thunderstorm, which was evidenced last week with a whirlwind of economic and geopolitical events.
Headline-driven sell-offs midweek led the major stock indices to end the week slightly lower. We witnessed a dire situation unfold in Afghanistan, but of larger impact to the markets was the Federal Reserve’s (“the Fed”) indication they plan to “taper,” or reduce, bond purchases later this year and eventually end them all together. The reason this is noteworthy is because the Fed has been purchasing $120 billion worth of bonds monthly since the beginning of the pandemic to help provide stimulus to the economy; this is commonly referred to as quantitative easing or “QE.” Buying bonds reduces the supply in the open market, causing prices to rise and keeping interest rates low. This also provides a greater supply of money into the system, which coupled with low-interest rates stimulates the economy. When the bond-buying is reduced, and eventually ends, this stimulus will no longer occur. The stock markets reacted negatively to this announcement this week, but this can be viewed as a positive signal since it indicates the Fed feels the economy is strong enough to continue growing on its own and no longer needs the stimulus.
The economy is transitioning as we move past the pandemic recovery and into a more mature phase with markets shifting from recovery mode to expansion mode. The transition between stages in the economic cycle has implications for various asset classes and sectors, which is why we remain vigilant and active in managing client portfolios to ensure they are optimally invested for where we are in the cycle.
Key economic releases last week were focused on retail sales, which came in below expectations. This was blamed on the rise of coronavirus cases from the Delta variant, however, it should be noted this data was from the prior month, much of which took place before the recent surge in cases was making headlines. It was interesting that many retailers which reported quarterly earnings this past week exceeded estimates and provided higher guidance for future earnings. The message from individual companies as consumer spending remains strong and is expected to continue through the rest of the year. The discrepancy between the monthly economic releases as well as the variances in individual company earnings reveals why individual security selection in a portfolio can be crucial. Consumer spending is a strong driver of the economy so we will continue to monitor this data for signals about the direction we are headed.
The major economic release this upcoming week will be quarterly GDP, which is expected to reflect another strong quarter of growth. There will also be data released for existing home sales and durable orders, however, what has the potential to move the markets would be further geopolitical events and the attention given to the surge in Covid cases. The market seems to be pricing in the downbeat headlines regarding the Delta variant so if the news becomes more optimistic we could see a quick upswing in the market.
At Secured Retirement, we keep a keen eye on what is happening in the world and what impact that has on the markets. We use this information to position our portfolios so they can weather all storms that may arise.
Have a wonderful week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.
Office phone # (952) 460-3260