Multiple Turning Points
One would have to be suffering from dehydration while sitting in the warm sun while contemplating the waves at this time of year not to notice that there are many turning points or shifts underway in the markets. We know change is on the way and we must prepare while not becoming overly defensive in posture. If we are too conservative in this market environment, it stands to reason that we will not make any meaningful returns.
The latter leads me to some thoughts on a recent article I reviewed. The author made the point that with rates so low the fixed income professionals’ job to provide sound advice is made even more challenging. I cannot agree more from both a market and credit vantage point. The article also emphasized the point that with nominal rates so low that real rates are continuing to be negative. I suppose the point is that investors would still prefer some nominal returns instead of none. The most interesting aspect of the article from a municipal reader’s standpoint is that there was no mention of the incredibly positive flows to the mutual funds and municipal ETFs week after week. One could also say the same about the corporate equivalents. We know that the markets can turn and wreak havoc on returns in these securities. But it is prudent not to have all of holdings in equities. But this is not an argument against equities. Returns in the equity markets have been record breaking.
The Fed talk has been increasingly focused on the eventual tapering event. The September Fed meeting is now being identified as the potential turning point. We recall all too well how even the mention of tapering in 2013 put an immediate chill on the markets. Many are suggesting that this time will be different. The many discussions and references to the potential start of the tapering is somehow setting up a greater acceptance of when it will happen and presumably not cause as much of a pronounced market reaction. As some are inclined to say, Really? I am not certain it will be very different. We are very accustomed to the knee-jerk overreaction in the markets. Perhaps, that outcome remains a bit more probable. I have not come across a cogent argument why this time should be different. I am not prepared to mount an argument in this line of reasoning.
The turning point for the infrastructure bill is fast approaching. Now that the Senate has voted in the affirmative the House commences its process. We will probably not know the outcome for some weeks. There continues to be the linkage consideration between the infrastructure bill and the “social” infrastructure bill. Some of the more Democratic moderates are calling for approval for the infrastructure bill on its own merits. I would certainly support such an action, but I do not have a vote.
The takeover by the Taliban in Afghanistan is certainly a turning point. There are so many uncertainties that arise with the changeover. So far, the market response has not been overly pronounced. But I caution there are many difficult days ahead. Historians will need to weigh in on whether our twenty years, the American lives lost, and the $1 trillion of spending on fighting the takeover was worthwhile. In the early years of Post 09/11 there are many reasons to believe that the effort was meaningful in the fight against terrorism.
Supply this week is quite large and above the weekly average this year. The supply is clearly not enough to absorb the redemptions and reinvestments that will be providing cash for accounts who will be open to buy. This imbalance between supply and demand and the low rates have been supporting the strong tone in the market. It would appear that the Fed is the only real factor that will provide a more significant turning point in this environment. Keep a watch while we enjoy sand and surf. I look forward to an uneventful birthday tomorrow.
John Hallacy
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