Taper Tantrum 2.0? | August 20,2021

Markets sold consistently across the week. Is there more red to expect in coming weeks?

Monday S&P 500 1.20% | NASDAQ 1.79%

Happy Tax Day! Retail sales expanded more than expected in March. Three major companies reported earnings, all three met expectations, all of which were financials. This was not surprising as financials usually head up earnings season. They also give us a good indication of how earnings season should go. Retail sales, however, took center stage as a strong consumer reduces the need for Federal Reserve Board (FRB) rate cuts. This caused an outsized move downward as investors anticipate less stimulus for 2024.

Tuesday S&P 500 0.21% | NASDAQ 0.12%

Housing data for March came in weaker than market expectation. Ten major companies reported earnings, with two missing expectations. Although mild, the losses continued. FRB Chair Powell indicated that inflation’s recent strength does not give the board confidence to start easing policy.

Wednesday S&P 500 0.58% | NASDAQ 1.15%

11 major companies reported earnings on the day, with three missing expectations. Focus was squarely on earnings as there was little economic data on the day. Tech stocks took a hit as AI chip orders for a specific company did not meet expectations. As would be expected this hit the tech heavy NASDAQ harder than the S&P 500.

Thursday S&P 500 0.22% | NASDAQ 0.52%

Initial unemployment claims remain benign. Existing home sales also slowed in March. 11 major companies reported earnings on the day, with one missing expectations. Markets were down for the day, but in a less dramatic fashion. Robust employment data typically is not favorable information when hoping for an FRB rate cut (as investors are).

Friday S&P 500 0.88% | NASDAQ 2.05%

Six major companies reported earnings on the day, with one missing expectations. NASDAQ led the way lower as Tech and communications got hit hardest. The best performers on the day were defensives, like utilities, healthcare, staples, and also financials.

Conclusion S&P 500 3.05% | NASDAQ 5.52%

The week was bloody. There was not a single up day for the S&P 500 or the NASDAQ Composite. The moves were not founded in fundamental data, as earnings did well. Some forward guidance shows warning of slowing revenues throughout the year, but that is normal for the last two years. Economic data, which signals the economy is doing well, has actually pushed stocks lower. The stronger the economy, the less likely the FRB is to act in reducing rates. The sell-off has extended to approximately 6%. It may take a breather in the coming days but expect that we are not done.

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Taper Tantrum 2.0 looks inevitable, but will it be as bad as last time?

Monday

The S&P 500 dug itself quite the hole on Monday morning. It spent the whole day climbing out of it and successfully closed 0.2% higher on the day. Strong earnings from Home Depot and Walmart buoyed markets.

Tuesday

Broadly, markets fell on Tuesday. Relinquishing all the effort from Monday’s trading activity. The S&P 500 fell 0.7%. Retail sales fell 1.1%, while a 0.7% increase was expected. The hit to consumption sent a shock through markets. The prevailing thought was, perhaps the re-opening trade will not last as long or as strong as many had expected.

Wednesday

After remaining stable most of the day, markets sold off in the closing hour of trading. The S&P 500 lost 0.85%. This was in response to Federal Reserve Board (FRB) minutes. They indicated tapering of their bond purchase program ($120B/month) may end sooner than most investors expected… Queue ‘Taper Tantrum 2.0’.

Thursday

Despite a volatile day, markets were little changed as the S&P 500 gained 0.1%. Initial jobless claims continue to impress as 348K jobs were lost. While 75% higher than pre-pandemic levels this is the lowest level since the beginning of the pandemic!

Friday

The markets bounced on Friday, as the S&P 500 rose 0.8% on the day. This did not erase the losses from the week but did manage to more than half those losses. The economic data and earnings calendars were light on Friday. This came more as a comeback bounce from the previous volatility. With all the concerns, the weekend news cycle was not one of them…

Conclusion

The last Taper Tantrum occurred in 2013 when the FRB decided to start trimming its bond purchase program ahead of rate increases in 2015. This is a form of monetary tightening. When the FRB buys bonds they go on their balance sheet and the money they paid goes into the economy (currently $120B/month). As they slow those purchases, less money is being infused into the economy. This time the FRB is attempting to telegraph the decision to taper bond buying as to not shock bond markets. These attempts will help, but regardless of their efforts markets will still react adversely to a tightening of monetary policy.

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