Consequential headlines and developments have hit the news tape as of late and it seemed to make sense to take this opportunity to offer perspective of these items which may have economic and/or market impacts.
Peak growth is the concept that economic growth has reached its pinnacle and slower growth is ahead. The perspective by the media is in accordance with their desire to generate revenue via sensationalizing the negative. The media seems to allude slower growth as negative growth or contraction. This couldn’t be farther from the truth.
It has been widely forecast for many quarters that initial explosive economic growth would moderate in the second half of 2021. Hence, moderating economic growth should be of no surprise, certainly not to the news outlets which reported such forecasts just a few months ago. The best way to think of peak growth is a car traveling on the highway reaching its peak speed of 100 mph and is now reducing its speed to 65 mph. The car has not stopped nor reversed but is continuing to travel forward at a more sustainable speed.
“Tapering” has entered the vernacular, with little context of its meaning. The Federal Reserve (Fed) has a few tools at their disposal to control or influence the interest rate environment. At the end of the day, interest rates are THE foundational aspect of all investing and business activities. The Fed only has direct control over overnight lending. As such, the Fed can only “influence” longer-term rates. One of the tools to do so is buying/selling bonds like any other bond trader, albeit a bond trader with near limitless means.
The Fed is currently buying $120 Billion per month in order to hold longer-term rates down. (As context, the Fed bond buying peaked at $85 Billion per month after the Credit Crisis.) The trick is to remove such massive support without causing major financial market disruption. The Fed is deliberating strategies and options to wean the economy off such large monetary support. Tapering efforts are expected in the coming months.
The CDC has recognized four COVID variants; Alpha, Beta, Gamma and Delta1. The Delta variant has garnered the bulk of COVID headlines as of late. Virulent concerns prompted the CDC to release new guidance on July 27th encouraging continued vaccinations and renewed mask wearing recommendations2.
What are the economic, market and investment implications? It’s too soon to tell as hard data, by its nature, is historical. However, soft data, i.e. surveys, may offer some insight. Specifically, recent consumer confidence and small business confidence surveys have moderated. Unfortunately, the impetus is not clear. The moderation could be a result of satiated pent-up demand, concluding summer vacations, concerns of Delta or a combination. Whatever the cause, moderating company revenue and earnings will likely follow.