International Forecaster Weekly

BUSINESSES WORRIED ABOUT COVID RISK Ready for QE to Go and for Powell to Stay

As we know, sentiment — of investors, traders and plain ole households — can drive the day-to-day direction of markets as the players react to the headlines and other events.

According to Charles Schwab’s latest Active Trader Pulse survey, the pandemic is once again the leading risk factor among traders.

Guest Writer | August 24, 2021

By Dave Allen for Discount Gold & Silver

As we know, sentiment — of investors, traders and plain ole households — can drive the day-to-day direction of markets as the players react to the headlines and other events.

According to Charles Schwab’s latest Active Trader Pulse survey, the pandemic is once again the leading risk factor among traders.

Respondents identify it as having the biggest impact on their investment decisions for the rest of the year. Covid ranked just ahead of inflation and Fed monetary policy.

Last week’s Global Fund Manager survey published by too big to fail Bank of America revealed that inflation and Fed tapering are the leading risks, followed closely by the spread of the Delta variant.

Jason Goepfert of SentimenTrader said, "Sentiment is among the most influential factors over the short- to medium-term as emotion swings with headlines, economic reports, and the latest corporate news."

In other words, even as the long-term fundamentals of a stock, bond or precious metal may be strong, news headlines that amplify traders’ concerns can cause prices to drop.

But Dave Lutz at JonesTrading says while he agrees that sentiment is a key driver of market volatility, that volatility may be limited when a particular concern is already well-known and built into prices.

He believes "the biggest factor…is the unknowns. "If a bad event (like the taper) is seen coming down the pike, the market can digest it no problem. 

“It’s when there are 'unknown' outcomes or events that really cause the ripple."

Market strategist Michael Antonelli at Baird cautions, however, that measuring sentiment accurately isn't as simple adding up the results of a survey.

"The issue is that there’s no real way to measure sentiment because it’s always changing as price changes. Trying to use it as a market-timing tool is incredibly difficult because it usually only works at extremes."

On the one hand, it’s often interesting to know what market participants are thinking about. 

On the other hand, that knowledge doesn’t necessarily make the market any more predictable or less volatile in a way that most traders and investors can use to their advantage.

Business Community Says Bring on the Tapering

Take the National Association of Business Economics’ most recent survey of its members — corporate economists, financial planners, cost analysts and business leaders.

The survey’s results show that the business community’s love affair with the Fed’s unprecedented accommodative monetary policy may be coming to an end.

The Fed has begun teasing the markets with signals it will soon announce plans to taper its monthly purchases of $120 billion in Treasuries and mortgage-backed securities.

That QE program was rolled out last year to keep interest rates ultra-low and bond markets ultra-liquid. Those low rates and the ever-flowing liquidity helped corporate debt to explode to record highs last year and to be used as leverage for stock buybacks and dividends in 2021.

As of earlier this month, 52% of the NABE survey respondents said monetary policy is “too stimulative,” twice as much as the 26% that said so when the survey was last conducted in March.

At the same time, 47% say it’s “about right,” down from 72% in March. And no one (0%) thinks it’s too restrictive, down from 2% in March.

According to the minutes of the Fed’s July policymaking meeting, “most” officials agreed that tapering should start by the end of 2021 if economic growth stays on track.

While the NABE didn’t ask its members if the Fed “should” begin tapering this year, 52% did say that the Fed “will.”

Will Jay Stay or Go?

Fed chair Jerome Powell joins the Kansas City Fed’s annual Jackson Hole Economic Policy Symposium  remotely from Washington on Friday, where he’ll undoubtedly present his latest views of the economy on behalf of his diverse colleagues.

Every year, the K.C. Fed hosts dozens of prominent central bankers, finance ministers, academics, and financial market participants from around the world at its scenic, cozy Wyoming event.

Besides partaking in food, wine and an occasional cigar befitting the global elite, the participants discuss economic issues, implications, and policy options related to the symposium’s theme — which this year is “Macroeconomic Policy in an Uneven Economy.”

Powell’s speech will likely take on added importance in light of Treasury Secretary Janet Yellen’s reported endorsement of a second term for him.

Several news outlets are reporting that Yellen told senior White House advisers last week that she supports reappointing Powell as Fed chair — a move that increases his chance for a second term.

President Biden hasn’t made a decision yet but is said to be leaning towards announcing his choice around Labor Day (that’s just two weeks away). 

Washington observers say keeping someone viewed by Wall Street as a trusted policy maker in charge of the world’s most powerful central bank would send a signal of continuity as the economy recovers from the pandemic.

But recriminations of Powell having overseen a Fed that has undertaken programs with record levels of monetary easing — several of them shrouded in secrecy — at the expense of a major growth in income inequality could send him back to practicing law…or writing his memoir.

One thing’s for sure: Yellen’s backing, with her almost two decades of experience at the Fed — and endearing herself to Wall Street with 6-figure speeches leading up to her nomination this year as Treasury Secretary — gives Powell a leg up on his closest “competitors” for the chair position.

Those other powerhouses include people like Fed governor Lael Brainard (a woman) and Atlanta Fed prez Raphael Bostic (an African American). 

Keeping a Fed chair, who just so happens to be a registered Republican, could also help Biden to mitigate GOP efforts to use rising inflation to him and other Democrats and their spending plans. 

Critics, including Republicans, like Sen. Pat Toomey of Pennsylvania, and even some Democrats, have said the Fed is at risk of letting inflation get out of control for the first time in over three decades. 

To ward that off, they’ve urged Powell to begin pulling back on the Fed’s massive bond purchases now, instead of waiting for “further significant progress.”

If markets are prepared, volatility and stock prices in light of any tapering announcement could be limited.

However and whenever the Fed decides to taper, though, its mere announcement will almost certainly result in a stock market correction, if not worse — especially if stimulus recipients and investors aren’t ready to see it go.

Do you think they are? Does that tell you how to prepare for what’s coming?