D.C. Drama Pushes Markets Around

Stocks continued to today, with the S&P 500 closing down 1% very near its 9/20 intraday low. The index is now 5% below its 9/2 high. Retailers fell after several Wall Street analyst downgrades (Kohl’s, Footlocker, Bed Bath & Beyond) due to falling profit margins and supply chain issues. Banks industrials 1.5% to 2%. Airlines sank 2% on the expectation for slower demand through the end of the year. On the other hand, biotechs, and internet stocks held small gains. Gold climbed 1.8% and Bloomberg News says “it’s hard to see why.” Crude oil initially jumped more than 1% but fell flat by the end of the session. The bond market was broadly if modestly lower as yields ticked up.  Long-term Treasury bonds are down about 3% so far this month and high-grade corporates are down about 1.7%. After drifting lower for the most of the past six months, mortgage rates are rising again. Bankrate.com’s average 30-year fixed rate is now 3.18%, the highest since June.

In congressional testimony this week Fed Chair Powell said that despite tapering, Fed policy will remain easy. “Inflation is well above target, but we have an expectations that high inflation will abate because the factors causing it are temporary and tied to the pandemic and re-opening of the economy.” He said the Fed would “keep accommodative policy in place.” Speaking of inflation, Bed Bath & Beyond reported weak quarterly results and the CEO said costs “rapidly accelerated” and at the same time he’s having trouble keeping goods on the shelves because delivery delays are now 30-45 days. He doesn’t expect supply chain disruptions to end until about mid-2022.

The US economy grew at a 12.2% pace during the second quarter compared with the year-ago quarter. You may recall that 2-3% is more typical. After being suppressed much of last year, consumer spending—the primary engine of our economy—is surging back. Notwithstanding the latest Covid Delta wave, growth is very strong. Corporate profits are expected to jump 20% this year, the unemployment rate is back down to 5.2%, and wages are rising. And yet, I’m confronted constantly by news articles barely concealing panic over the slowing economy. Of course it is! Our economy is in the process of finding its equilibrium and growth will normalize. The Federal Reserve expects the economy to grow 3.5% to 4.5% next year. Likewise, inflation—now about 5%–should moderate toward a range of 2-3%. Citigroup’s Economic Surprise Index, measuring the degree to which data are coming in better or worse than expected—is flat. In words, the V-shaped recovery from Covid is complete and we’re passing into a new phase of more normal—but still healthy—growth. Perhaps the stock and bond markets should correct a bit and tread water for a time while we go through this transition. But that doesn’t mean the economic cycle is over.

House Speaker Nancy Pelosi is apparently eager to hold a vote not on the Democrats’ $3.5 trillion tax-and-spend plan, but on a separate, bipartisan $550 billion plan. The two bills have pursued parallel courses in congress but of could Democratic leaders and the president have favored the larger one. Intra-party negotiations on this incredibly ambitious plan have been messy to put it politely. Perhaps she just wants to get something passed. But let’s not forget that the debt ceiling vote is also upon us, and she may hope that advancing the bipartisan stimulus bill will encourage Republicans to vote for a suspension of the debt limit through the end of the year. Of course, this move incensed the socialist wing of the Democratic Party, who only want to consider the $3.5 trillion plan. So while Ms. Pelosi rather nonchalantly said, “So far, so good for today” in a press conference earlier, no one believes that. The House Majority Leader says he doesn’t believe the stimulus bill will pass. All three sides–socialists, moderates, and Republicans–are holding hostage the looming debt ceiling & intertwined government funding issue in order to gain an advantage in the stimulus debate.