Tag: inflation

Prepare For A Post-Powell Fed

Posted on by George Yacik

If financial market participants were voting, Jerome Powell would likely win a resounding second term as Federal Reserve chair. He would also probably be approved by the Senate, but that would assume President Biden nominated him. Unfortunately, that's become less likely to happen.

The latest straw against him was the trading scandal that led to the resignation of two of the Fed's 12 regional bank presidents. While the Fed last week announced new restrictions on trading to prevent this from happening again, it also brings the scandal back into the public eye at the worst possible time for Powell, whose terms end in February. While he certainly can't be blamed for the deeds of others—especially when they happened at the Fed's regional banks, not the Fed itself—and he deserves credit for acting swiftly and decisively in their wake, the fact is that they occurred on his watch. As a result, he won't be able to deflect all of the blame.

More to the point, it exposes how cozy the Fed is to the financial markets when its officials are supposed to be purer than Caesar's wife. While Powell probably didn't know about those two Fed presidents' trades beforehand, the episode makes it look like the Fed chair isn't in charge of his own house. Continue reading "Prepare For A Post-Powell Fed" →

Market Swoon - Deploying Capital

Posted on by Noah Kiedrowski

Market Swoon

Inflation, interest rates, employment, Fed taper, pandemic backdrop, Washington wrangling, supply chain disruptions, slowing growth, and the seasonally weak period for stocks are all aggregating and resulting in the current market swoon. The month of September saw a 4.8% market drawdown, breaking a seven-month winning streak. The initial portion of October was met with heavy losses as well. Many individual stocks have reached correction territory, technically a 10% drop, while the Nasdaq is also closing in on that 10% correction level. Many high-quality names are selling at deep discounts of 10%-30% off their 52-week highs. The outlook for equities remains positive after the weak September as the economy continues to move past the pandemic. During these correction/near correction periods in the market, putting cash to work in high-quality long equity is a great way to capitalize on the market weakness for long-term investors. Absent of any systemic risk, there’s a lot of appealing entry points for many large-cap names. Don’t’ be too bearish or remiss and ignore this potential buying opportunity.

Deploying Capital

For any portfolio structure, having cash on hand is essential. This cash position provides investors with flexibility and agility when faced with market corrections. Cash enables investors to be opportunistic and capitalize on stocks that have sold off and become de-risked. Initiating new positions or dollar-cost averaging in these weak periods are great long-term drivers of portfolio appreciation. Many household names such as Starbucks (SBUX), UnitedHealth (UNH), Apple (AAPL), Amazon (AMZN), Micron (MU), Adobe (ADBE), Qualcomm (QCOM), 3M (MMM), Facebook (FB), Johnson and Johnson (JNJ), Mastercard (MA), Nike (NKE), PayPal (PYPL) and FedEx (FDX) are off 10%-30% from their 52-week highs. Even the broad market indices such as Dow Jones (DIA), S&P 500 (SPY), Nasdaq (QQQ), and the Russell 2000 (IWM) are significantly off their 52-week highs. All of these are examples of potentially buying opportunities via deploying some of the cash on hand. Continue reading "Market Swoon - Deploying Capital" →

Is The Worker Shortage Transitory?

Posted on by George Yacik

For the past several months, there have been two "T" words that have captivated the financial markets.

The first, of course, is the "Taper," which now looks like it may be starting as early as next month. Following its September monetary policy meeting, the Federal Reserve—using its usual weasel words—didn't exactly say it was ready to taper, but basically confirmed that it would begin soon, saying that "a moderation in the pace of asset purchases may soon be warranted." So we can probably expect the Fed to provide more definite information following its next meeting in early November, and that may include a start date of later that month.

The second "T" word is "Transitory," as in the "inflation is transitory" mantra Fed chair Jerome Powell has been repeating for most of 2021. However, recently he's backed off a little on that stance, telling Congress last month that while he believes inflation will eventually return to the Fed's 2% target rate, "these effects have been larger and longer-lasting than anticipated." In other words, maybe inflation isn't as transitory as he says, therefore the need to taper.

Now, after two crummy monthly job reports in a row, it may be fair to ask if the shortage of workers holding back the economy isn't transitory either. Continue reading "Is The Worker Shortage Transitory?" →

Ominous Inflationary Signs Evident

Posted on by Noah Kiedrowski

Inflation Revving Up

Earnings season is getting underway, and thus far Costco (COST), Federal Express (FDX), and Nike (NKE) have warned that inflation is real and is bound to hit consumers as the holidays approach. Costco, Federal Express, and Nike are seeing rising shipping costs and supply chain disruptions that persist and should continue through the upcoming holiday season. In particular, the cost to ship containers overseas has skyrocketed over the past few months. These rising inflation expectations and the realization of these inflationary pressured could cause the Federal Reserve to change policy course sooner rather than later. It’s going to be a tug-a-war between inflation, employment, Washington wrangling, and the delta variant backdrop. CPI reports will become more significant as these readings are used to identify periods of inflation. The recent CPI readings result in a much stronger influence on the Federal Reserve’s monetary policies hence the recent taper guidance.

Real World Inflationary Commentary

Supply chain disruptions, specifically in the shipping channels, have led to rising freight costs that have escalated shipping costs dramatically. The cost to ship containers overseas has soared in recent months. A standard 40-foot container from Shanghai to New York costs about $2,000 a year and a half ago pre-pandemic. Now, it runs some $16,000, per Bank of America.

Costco CFO Richard Galanti called freight costs “permanent inflationary items” and said those increases combine with things that are “somewhat permanent” to drive up pressure. They include freight and higher labor costs, rising demand for transportation and products, shortages in computer chips, oils, and chemicals, and higher commodity prices. Continue reading "Ominous Inflationary Signs Evident" →

Financials - Clear Runway Ahead?

Posted on by Noah Kiedrowski

The Taper

The Federal Reserve indicated that the central bank is likely to begin withdrawing some of its stimulatory monetary policies before the end of 2021. Although interest rate hikes are likely off in the distance, the economy has reached a point where it no longer needs as much monetary policy support. This pivot in monetary policy by the Federal Reserve sets the stage for the initial reduction in asset purchases and downstream interest rate hikes. As this pivot unfolds, risk appetite towards equities hangs in the balance. The speed at which rate increases hit the markets will be in part contingent upon inflation, employment, and of course, the pandemic backdrop. Inevitably, rates will rise and likely have a negative impact on equities.

A string of robust Consumer Price Index (CPI) readings spooked the markets as a harbinger for the inevitable rise in interest rates. Although rising rates may introduce some systemic risk, the financial cohort is poised to go higher. Moreover, the confluence of rising rates, post-pandemic economic rebound, financially strong balance sheets, a robust housing market, and the easy passage of annual stress tests will be tailwinds for the big banks.

2021 Financial Stress Tests Easily Pass

The recent stress tests were easily passed and indicated that the biggest U.S. banks could easily withstand a severe recession. In addition, all 23 institutions in the 2021 exam remained "well above" minimum required capital levels during a hypothetical economic downturn. Continue reading "Financials - Clear Runway Ahead?" →