THE WEEK IN REVIEW: March 14 – 20
Low rates until 2023. That’s good, right?
Federal Reserve Chairman Jerome Powell did his best Mario Draghi impersonation after last week’s Fed meeting, telling everyone what they wanted to hear but not really doing anything. There’s no inflation to fear and the Fed will keep rates at current low levels until at least 2023. Just like that, the 10-year U.S. Treasury spiked up to 1.75% from about 1.60%.
Remember when we rose above 1.5% and tech stocks took it on the chin? The market likes to buy on the rumor and sell on the news, as the old adage goes. Chairman Powell told us one thing while reality said something else; as a result, we began to see a marked decline in the tech-ladened Nasdaq as Treasury rates pushed up. So far, the Nasdaq is only a few hundred points (~13,300) off where we started the year and is well off last month’s high of over 14,000.
After the vaccine and bloated stimulus bills have worked through the system, the markets will focus on the actual results of these drivers. How long will it take for the vaccines to get us fully reopened and back to normal? Will we suffer an unforeseen major setback like Europe? (More on this in a minute.) What happens when the stimulus checks are spent? What happens when it’s time to extend unemployment and housing support?
Draghi (now Prime Minister of Italy) famously said in 2012, “The ECB … is ready to do whatever it takes to preserve the Euro. And believe me, it will be enough” — whatever enough was. It appears, that like Draghi, Powell has only words and very little at his disposal other than to raise rates when the party inevitably comes to an end. The Fed continues to bolster a low-rate environment even as the economy appears to need less support, while policies continue to emerge with the potential to threaten to hamstring markets and stall our recovery.
All quiet on the western front … again.
France has gone into lockdown again after concerns that the AstraZeneca vaccine may cause blood clots for those being vaccinated. The new lockdown is a major setback for Europe since they are only using the AstraZeneca vaccine. Unless these concerns are quickly addressed, we may be looking at an additional year of misery in Europe. They will have to scramble to secure additional vaccines from us, but there are other countries in line.
The U.S., on the other hand, has three effective vaccines — one of the clear benefits of “Operation Warp Speed” that the prior administration provided for us. As Europe struggles with a third deadly wave, we are well on our way to vaccinating our population by early summer. I will confess I had doubts about President Joe Biden’s claim to hit 100 million doses in his first 100 days, but it did happen – and in 58 days to boot! I hope we stay on this pace and have everyone vaccinated by Memorial Day so we can finally all enjoy the summer.
Biden tax hikes
Now that the $1.9 trillion stimulus package has been passed and direct payments are flowing to some Americans, the Biden administration has started a conversation around tax legislation. The wisdom of bringing up tax legislation (or, really, increases) on the heels of a stimulus meant to get the economy going is perplexing. In my opinion, it’s kind of like buying something in a store, walking out to your car, and then walking right back into the store and returning the item. Why would you give people money and then want to collect more in taxes?
The administration is looking at higher rates on the wealthy, an increase in the capital gains tax rate, higher corporate tax rates, a wealth tax and so on. In my view, all of these taxes will be bad for the markets. Some, like the wealth tax, are probably even unconstitutional, while others, in my opinion, are just bad policy and may hurt the market for an extended period. For example, higher capital gains taxes will likely encourage investors to sell now to pay lower taxes and then discourage investment. Higher corporate taxes can crimp earnings and hurt valuations; over time, these taxes may make our corporations less competitive globally and possibly result in job losses for Americans.
The refuted and tired refrain of the “rich paying their fair share” will lead to a higher minimum tax rate on the wealthy. The idea is unfair yet popular, especially when you feel it won’t impact you.
More disturbing was the “clarification” of President Biden’s campaign promise that “Nobody making under $400,000 a year will have their taxes increased.” The $400,000 is for households, and last I checked, my definition of households is plural and “nobody” is singular. In some places, life on $400,000/year is not all that grand. The line of who is wealthy begins to creep lower and lower, so I cannot see how this policy move can help an economic recovery or a continued rally in the stock market. It is currently hard to tell if the proposals will become a reality and there’s a chance that the policy may turn out to be constructive and beneficial. It’s still too early to tell, but in my opinion, it does not appear to be a good thing on the surface.
Coming this week
  • I believe this will be a good week for data, highlighted by the long-awaited reading of first quarter GDP on Thursday. Strong economic growth is expected, but predictions are all over the place. If we see growth above 5% in the quarter, markets will not need to reconsider our current levels. Anything lower may give us a cause for pause.
  • Fed officials will be out in force after last week’s FOMC meeting. Deviations from the script will be worth noting.
  • Existing Home Sales, New Home Sales and Mortgage Applications will come out in the first half of the week, providing a glimpse of the housing market’s health. Personal Income, Consumer Sentiment, and Retail and Wholesale Inventories on Friday will give us a view of the strength of current economic consumption.
  • Again, the weekly unemployment number can mess with markets if it’s not in line or improving. That number remains elevated, although it has leveled off in recent weeks.
  • The 7-year note auction is Thursday at 1 p.m. Eastern. This was the auction that roiled the 10-year a few weeks ago.
Have a great week!
Tom Siomades
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