Insights & Advice


Deficit deal bolsters markets

Our politicians in Washington, D.C. did what they do best this week by kicking the debt ceiling can down the road until December 16, 2021. Until then, we can switch our focus to the Fed’s November decision on tapering their bond purchases. Does anyone have any Pepto Bismol?

Financial markets roared higher on the news of this temporary reprieve, but at what cost? For one thing, the passage of the infrastructure package and the larger social support program that would provide additional stimulus to the economy will likely be delayed until after the debt ceiling is raised.  That robs the economy of additional growth potential between now and the end of 2021, if not later.

In addition, the uncertainty over the debt ceiling will likely keep interest rates elevated and the safe-haven U.S. dollar climbing. A strong dollar will hurt most companies in the S&P 500 Index that derive a great deal of their revenues from overseas. None of this should make investors happy but, in a market where buy and sell decisions are measured in hours (if not minutes), eight more weeks until judgement day is an eternity.

And don’t believe the media who claim Senate Minority Leader Mitch McConnell caved into President Biden’s or big business’s pressures. He is far more astute than that. The mid-term elections are not that far away. Anything that hurts the economy in the interim tilts the odds in favor of Republicans regaining majorities in both Houses.

The entire debt ceiling fiasco, in my opinion, is about forcing Democrats to use the reconciliation process, rather than trying for a bipartisan vote, so that McConnell can continue to claim it is the Democrats alone that are driving up the nation’s debt due to their tax and spending policies. Some, but not all, U.S. voters realize that the spending limit on debt needs to be increased because of past GOP spending decisions during the last four years. It remains to be seen how far the Republican Party is willing to go in order to propagate this farce in exchange for political advantage.

We still have other fish to fry in the coming weeks. The Fed’s decision to reduce their asset purchases is looming. Most analysts believe the November 2021 FOMC meeting will be the trigger to announce the beginning of the end in bond purchases. The plan is to reduce bond buying by $10-$20 billion/month until June 2022. At that point, the Fed may or may not begin raising interest rates, depending upon economic activity and what happens to the inflation rate.

The September jobs reports, announced Friday, October 8, 2021, was disappointing. Only 194,000 jobs were added, which was less than half the number of jobs expected. The thinking was that a weaker number might dissuade the Fed from beginning asset purchases, at least for another month or two, which would be good for equities. Instead, stocks vacillated in a narrow range most of the day.

I believe that the Fed’s actions are the underlying cause for the market’s recent declines. Let’s face it, the Fed is taking away the punch bowl, however slowly and carefully. On the margin there will be less money entering the financial system, and less money means to me, less money for speculation.  And speculation over the past year has run rampant in financial markets (think Meme stocks, SPACS, Crypto, etc.)

What U.S.-centric investors fail to realize is that what the Fed is doing here, other central bankers around the world are doing as well. The European Central Bank began slowing its asset purchases last month. Other countries are following suite. India, for example, announced their own tapering on Thursday, October 8, 2021.

Inflation in many emerging markets is also climbing rapidly forcing several countries in South America and elsewhere to raise interest rates. South Korea hiked interest rates in August, which was the first developed economy to do, but it won’t be the last. From a global perspective, therefore, the marginal amount of money flowing into financial markets for speculation is decreasing more than most people suspect.

So where do the markets go from here? That depends on whether the bulls can push the S&P 500 Index above its 50 Day Moving Average (DMA). That magic number would be a close above 4,431. That is just 20 points higher from here. But the chances, in my opinion, are only 50/50 that will happen. If not, we could easily retest the lows of this pullback next week. Pepto Bismol, anyone?

Posted in At the Market, BMM Articles, Bond / EconomicTagged , , , , , , ,