Fed Talk Telegraphs Taper - Adviser Investments

Fed Talk Telegraphs Taper

August 24, 2021

Please note: This update was prepared on Friday, August 20, 2021, before the market’s close.

The chaotic humanitarian crisis in Kabul, wrenching to watch and devastating for those scrambling to escape, had little to do with the stock market’s mini retreat this week. But the events in the Middle East and Central Asia offer a stark reminder that the world is full of risks that can’t be controlled.

The wobbly week on Wall Street can be primarily attributed to the Federal Reserve and “taper talk” along with rising COVID-19 infection rates in major economies like the U.S. and China—both of which, investors fear, could slow down the economic recovery that’s been priced into the market.

Still, nearly two-thirds of the way through the year, stocks have been hitting highs on a regular basis. At Thursday’s close, the S&P 500 (including dividends) has doubled since the March 2020 pandemic low.

Of course, shift the parameters on that calculation a bit and the story changes dramatically. Since the start of 2020, the S&P has gained 40%. That’s not a bad return over a 20-month period—but it’s not double.

Readying the Booster Brigade

While low interest rates and strong corporate earnings have propelled stock market gains, we’re already seeing signs of the delta variant taking some wind from the growing economy’s sails. Last week, we highlighted some high-frequency data, like air travel and dining out, which showed consumers were pulling back a bit. On top of that, a leading measure of consumer sentiment fell to a decade low in early August. If shoppers retreat to the safety of their homes, that’ll slow the economic recovery further.

While it’s too soon to predict the full effects of countervailing factors (such as delta), we think confidence may get a boost by this week’s announcement that a next wave of inoculations is on the horizon. Booster shots are a sign that the medical and economic impact of the delta variant is manageable as we head into the fall flu season and a return to school. They are also an indication that modern medicine has many more tools today to reduce the worst-case outcomes for COVID-19 patients than were available 18 months ago.

Timing the Taper

Inflation and the labor markets remain the primary focus of the Federal Reserve. The minutes from last month’s policymaker meeting show central bankers believe that “a continuation of accommodative monetary policy” remains necessary to return the nation to full employment. In their view, inflation (as of late July) hadn’t run persistently hot enough to warrant letting up on the gas.

A lack of consensus on when to begin slowing the bond buying program is evident in the meeting minutes, and increasingly in public statements by Fed presidents—though the majority favor reducing their asset purchases this year. We’ll be on the lookout for any clues dropped at next week’s annual symposium in Jackson Hole, Wyoming.

Regardless of whether the central bank begins to dial back its stimulative bond purchases by the end of this year or early in 2022, it’s clear that the Fed believes booster shots to our economy remain necessary for now.

Will Earnings Continue to Drive Stocks Higher?

Most of the S&P 500 companies have reported second-quarter earnings now and the gains have been exceptional. And analysts, typically an optimistic bunch, see earnings trending higher well into 2022. Even if some Wall Street soothsayers foresee a bit of a dip in earnings in the latter part of 2021 and into early next year, they are predicting new profit highs in Q2 2022 and further gains from there.

Sources: S&P Dow Jones Indices, Adviser Investments.

These bullish prognostications don’t mean it’s forever up from here—remember, the current bull run has benefited from a total lack of tangible market risk. So far this year, the S&P 500’s worst pullback came in a 4.2% decline in late March and early April—a drop that was recovered in five days.

The best path ahead is to recognize that stocks are rising on the back of strong earnings and a Fed that’s kept interest rates low. Since we don’t have a crystal ball—any more than Wall Street analysts do—we’ll guard against a turn for the worse and be pleased when it doesn’t appear. Regardless of earnings and interest rates, what we are fully confident about is overseeing diversified portfolios that are built for both calm and stormy markets.


Financial Planning Focus
Financial Planning in Your 20s

Is youth really wasted on the young? Not necessarily.

Our 20s are a time of opportunity—advancing our education, starting a career, carving out a place in the world and perhaps finding someone to share it with. Far from wasted, our youth is when many of us establish the financial routines that form a foundation for the rest of our lives.

Here are five best practices to follow yourself, or pass along to your children, grandchildren or other young people you care about to set them on a course for financial success now and in the future:

  1. Invest early and often. When you start earning a paycheck, strive to put away at least 10% of your pre-tax income for retirement. This sounds like a lot, but keep in mind that this 10% includes any matching funds you receive from your employer through a 401(k) plan, for example. Tap into the power of compounding by investing at an early age and allowing the market to work for you.
  2. Invest for the long haul. You can weather greater risk when you are young; there’s more time to recover from—and capitalize on—inevitable market downturns. You won’t be touching your retirement accounts for decades, so make stocks or stock funds a major component of your portfolio.
  3. Create an emergency fund. Can you afford to continue paying your monthly bills if you lose your job unexpectedly? The rule of thumb is to set aside six months of household living expenses to cover you in a crisis. (Our Budget Worksheet can help you plan ahead.)
  4. Establish your credit. Your credit score reflects your financial health and has an impact on how much you’ll pay for big expenses down the road: Interest rates on home and car loans and insurance premiums are often based, in part, on your credit history. Potential employers may also check your credit history to get a read on your financial stability. Review your credit score and credit reports on a regular basis. We recommend adding at least one credit-monitoring app to your phone—Credit Karma, Mint and Credit Sesame all monitor your credit score and provide tips on improving it.
  5. Maximize company benefits. Your employer may match your 401(k) contributions or offer other benefits. Take advantage of these perks, including health savings accounts, life and disability insurance and other savings like discounts on gym memberships or continuing education. Check with your company’s human resources department to make sure you are aware of all benefits available to you.



Strategy Activity Update

Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations.

Dividend Income

No trades this week.

AIQ Tactical Global Growth

Sell  Fidelity MSCI Communication Services Index ETF (FCOM)
Buy Fidelity MSCI Utilities Index ETF (FUTY)

AIQ Tactical Defensive Growth

No trades this week.

AIQ Tactical Multi-Asset Income

No trades this week.

AIQ Tactical High Income

No trades this week.


Adviser Investments’ Market Takeaways

In this week’s Market Takeaways, Liz Laprade expanded on the climate report through an investment lens, while Steve Johnson looked at the five-letter words driving today’s market.

Looking Ahead

Next week, we’ll get a meaningful slate of reports on what businesses are thinking and what consumers are doing and saying: Manufacturing and service sector activity, new and existing home sales, durable goods orders, personal income/savings/spending data, consumer sentiment and the first revision to second-quarter GDP.

As always, you can visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.

About Adviser Investments

Adviser Investments is a full-service wealth management firm, offering investment managementfinancial and tax planningmanaged individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.

Please note: This update was prepared on Friday, August 13, 2021, before the market’s close.

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