Market Pulse: Thoughts on the market
Special to the Tribune
The Fed is setting the stage to start tapering, i.e. reducing its bond buying and ultimately ending the program.
The Fed must feel that the economy needs no more help from them given the spending by Uncle Sam. On that they’re right, but for now we have to get past the delta variant’s short-term impact on demand and with it the outlook for profits and stock prices. Add in the timing of the first rate increase — sooner than earlier thought — and you can see why investors might be cautious.
The last time investors reacted in what was called a “taper tantrum” stocks actually did well after the initial knee-jerk selling even though interest rates rose. This time the inevitable tapering is already reflected in prices since Fed Chief Powell has announced that tapering will likely begin this year.
In August 235,000 non-farm jobs were added, fewer than expected (735,000) and a fraction of those the month before. Blame the delta virus. Numbers don’t tell the whole story. Real wages (adjusted for inflation) have been falling all year. Prices have been rising at the supermarket, at the gas pump, for houses and services of all kinds. People on the street know that. Life-styles are being impacted.
The Fed’s stimulus successfully brought the economy out of recession, but it has also increased the gap between the rich and the poor. There is scant reason for the Fed to continue to buy $120 billion month after month.
So after the Fed reduces (okay, tapers) its purchases and ultimately ends the buying spree the next step would be to raise rates. Stock investors shouldn’t fear rising rates. Rates won’t rise enough to make bonds competitive with stocks, many of which (utilities, pipelines, drugs, etc.) will still yield more than bonds.
There remains one powerful offset to the real and potential short-term negatives. Trillions of dollars are on the sidelines waiting for an opportunity to buy stocks and maybe to some extent bonds. More will go to the former than the latter due to paltry bond yields. Good.
Whenever a little selling appears, whether triggered by news or simply a case of profit-taking, investors eventually “buy the dip,” as they say. Doing so has been smart for years, which is why the S&P 500 has set 54 record highs this year. That’s the highest since 1995.
We are in the middle of a seasonally weak period for the stock market. Since 1928 September is the market’s worst month, losing 1% on average. But November through January is historically strong.
I like what I like, especially stocks with reasonable valuations and rising dividends (pipelines, drugs, some banks and financial companies). Add to that higher risk income plays like Ares Capital (ARCC). There are better days ahead.
David Vomund is an Incline Village-based Independent Investment Adviser. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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