How Equities Can Rally After September’s Selloff
At some point, it had to happen.
After months spent watching paint dry, investors were treated to some September fireworks as US equities finally snapped out of an eerie summer lull.
One of the defining features of stocks' slow grind higher into last month's selloff was an uncomfortable juxtaposition between extremes on various crash metrics and rock-bottom realized vol. Eventually, that required "a 'true-up' reconciliation," as Nomura's Charlie McElligott put it Friday.
It was, of course, no
Sigh, those pesky lawmakers. How could they spoil Christmas? Let us discount the ways.
Infrastructure (physical) bill. I think investors’ expectations are low. If there is no bill, some subsectors would get hit, but we’re probably talking a mid-single digit pct of SP500.
Infrastructure (social) bill. Do investors care about this? It has already shrunk from $3.5TR to $1.5TR – maybe The Squad doesn’t accept that, but Manchin and his ilk hold the cards. A third of the loaf, or no loaf? I’m not sure investors, in the aggregate, care all that much.
Tax increases. These have been whittled down to 25% corporate, 39% top marginal individual, some modest increase in cap gains, and I’m not sure what else. Investors won’t mind if that erodes further.
Debt ceiling increase. Ok, this is a “have to have”. And a buying oppty if things look shaky.
Fed Chair. Investors probably want Powell back, simply because uncertainty = bad. Warren’s attacks are probably a gift to his chances.
Hardline Policy vs China (Biden). Everyone already sees the next Cold War emerging. Short of active shooting, how to be unfavorably surprised? China can certainly roil the markets further, but not clear it needs US help to do so.
Drug pricing. Sector specific risk, and that sector has already been performing blah-ish. Healthcare P/Es, for those with E, don’t discount much growth. The group without E is quite a laggard as well.
Crypto regulation. Something that will greatly upset a rather small percent of investors.
What am I missing?
Don’t seem to be missing much. I, for one, would love to see the tax increase proposals slip some more and the whole shebang be put off until the new year when the election cycle will put more pressure on making the whole mess disappear. Meanwhile, I’ll get my booster and my flu shot and venture out in the actual world a bit more.
Jyl, thanks for your comment! Perhaps the biggest risk right now is coming from inflationary pressures that could force the fed to raise rates unexpectedly and sharply:
– climate change is pushing the cost of food up
– re-openning activity, supply chain disruptions are pushing the price of commodities up
– pandemic fear, overall healthy family finances is pushing the price of labor up
– past bankruptcy of shale oil producers, low water levels at hydroelectric plants are pushing energy prices up
– most central banks printed money during the pandemic, and all that cash is going everywhere except savings accounts, pushing the price of everything up
The pressures may all be temporary, but central banks around the world are being tested in their resolve to stomach inflation overshoots.
If I were the fed, I would not alarm anyone until it’s time to stop the music. In the background I would prepare a team to pick up the pieces. Tapering will cause rate increases. The fact the central bank is telling people otherwise implies they’re leaning too much on social psychology (they’re bluffing).
IMO the biggest risk is central banks over reacting to non-inflationary price increases. The central banks have near zero impact on current price increases. The global over reaction of monetary policy could (maybe is) set(ting) us up for a deflationary death spiral in 2-5 years.
What is actually needed is global coordination to resolve the supply chain disfunction. Free market capitalism has failed to meet the moment and the collective of global supply chain players are doing very little to mitigate the issues.
The global supply chain crisis is being treated like an unavoidable and pre-ordained economic inconvenience. It is far worse and should be addressed as the crisis it is before the roots of the next global war are grown as happened in 1920-30’s.
I hope, and will continue investing as if, what you’re saying is true. Thanks for the perspective!
Thanks to H I’ve started reading more about MMT. At the very least, it’s time for serious discussions by those in charge as to its workability. It never ceases to amaze how a world trying to embrace change can imbed outdated concepts without a thought. Unfortunately, the chances of serious discussions about central banking happening in the current environment are close to nil. I would add to that the question of how much climate change has (and will) put downward pressure on financial conditions is barely being considered.
Longer term I see markets stagnating at best. Global negative headwinds are great and global governing systems are not up to the task. Humans, as a species, have finally outrun our ability to adapt to change. We’re lost in the wilderness and are out of matches.