Last week was a tough week for equities. It was not just that equity market participants overlooked any supposed positive impact created late in the week around the president's vaccine mandate, or the president having placed a phone call to his counterpart in Beijing, as those two events were taken well by the marketplace. It was more the uncertainty around the potential trajectory for paths taken by policy makers in our nation's capital that forced a week-long crawl toward the profit taking exits into a headlong run for the "fire doors" late on Friday afternoon.
The "Big Picture" runs up against two quasi-deadlines that could force some kind of shift in policy this month. First, the Federal Reserve's FOMC will have to meet on monetary policy next week and produce an official statement that at least directly addresses the idea of scheduling a reduction in the pace of the Fed's monthly asset purchase program next Wednesday, September 22. Then, there is the congressionally self imposed deadline of Monday, September 27th for at least the House of Representatives to address both the $550 billion to $1 trillion (depending on who's counting) infrastructure bill and the up to $3.5 trillion Federal social spending framework that certain members of the Democratic caucus wish was either much larger or much smaller, thus threatening the whole ball of wax in its entirety.
The late Friday catalyst came in the form of news that Senate Democrats had come up with a proposal (The Stock Buyback Accountability Act) that would levy a 2% excise tax on the total of dollars spent by public corporations buying back their own shares. The Apple (AAPL) news did not exactly help either. (I am not selling any AAPL.) According to backers, the plan would raise more than $172 billion over a decade that could help pay for the large addition to the federal budget mentioned above. Of course that plan also assumes that buybacks remain at record or close to the record pace created by the corporate tax cuts of 2017, even if said corporate tax rates are increased and this specific excise tax is enacted, which of course is absolutely ridiculous.
Crazy idea? How about we address the debt ceiling first, gang. Just thinking out loud again.
Price Discovery
Keyword reading algorithms react to... well... headlines and keywords. Hence, the floor fell out of the equity marketplace late on Friday without much thought given to price discovery. I would expect equities to at least try to rally on Monday morning, but that in no way means that the marketplace will be a safe place for the balance of September. I warned you about this as far back as mid to late August.
The economy is slowing. The big banks, though extremely (I mean... holy moly, wake the heck up) late in coming to this understanding, have indeed finally arrived. The Delta variant, though seeming off of peak rates (hopefully) of infection is still deterring enough normal behavior as to slow commerce, constrict supply chains, and subdue labor market participation... either through fear or lack of suitable options for child care.
Most long-term models for the S&P 500 and Dow Industrials do reveal a seasonal shift in the way of a rather sharp sell-off that on average strikes sometime between September 15th and 17th (That's this week, cowpokes). Understand though, that though Autumn was indeed a weaker season for equity markets in 2020, the actual low (to date) for the S&P 500 struck on September 24th and stocks rallied into October only to retest levels slightly above those lows around Halloween. Markets then rallied in response to the perceived certainty of the election even if a sizable portion of both the media and the electorate did not.
Point Being
My point is that the investor who stays the course throughout will likely suffer some seasonal anguish, and would probably be outperformed by the trader who turns assets into cash in mid-September intent on re-establishing most of those positions with marvelous precision in timing at some point prior to November. While true, I know that I am likely not sharp enough in my timing to be that trader, and I am quite confident in my standing among that broad group of individuals.
My thinking for now, with the S&P 500 and Dow Industrials coming off of twin five day losing streaks that broke the 21 day EMA (4482) for the S&P, as well as both the 21 day EMA and 50 day SMA for the blue chip index, on top of a four day Nasdaq Composite losing streak that still leaves that index above all three of my most focused upon significant moving averages, is that there will be at least some interest in buying this dip. That's fine for traders who also understand how to manage or hedge their risk.
For the balance of those "do it yourselfers" please understand that none of our key equity indices is even close to being technically oversold at this time, as the market heads into a week that will contain data for consumer prices, and retail sales in addition to the seasonal risk. What you have is that August statistical risk, in addition to the already mentioned seasonal risk, multiplied by headline policy risk on multiple fronts over the next two weeks.
In other words, keep your helmet on, and buckle your chin straps. This may or may not get ugly, but speaking just for me (and some people from Tennessee), I would rather not be a leader to the upside if the trade-off is that I have protected myself from leading to the down-side.
What Else?
Over the weekend, two potentially major inputs were made toward the future trajectory of fiscal policy. One, Bloomberg News reported that House Democrats might back a 26.5% corporate tax rate as the Ways and Means Committee works toward coming up with ways to pay for the aggressive budgetary agenda set forth by the Biden administration and the even more aggressive agenda hoped for by the extremists within the Democratic party.
The Ways and Means Committee is likely to at least debate a set of proposals on taxation this week (also a headline risk) that though not openly confirmed, would include this increase in the corporate tax rate from the current 21%, but also happens to be the midpoint between the 25% spoken of by moderate Democrats and the 28% suggested by the president.
In addition, it seems likely that the committee will seek an increase in the capital gains tax from the current 20% to 25%, well below the 39.6% that the president had hoped for should capital gains be taxed as ordinary income, after of course bringing individual income tax rates up to that level for the highest earners as well.
My very biased opinion? Why on earth should capital gains be taxed at the same rate as wages? Wages come with no risk. You work 40 hours, you get paid for 40 hours. Capital investment does not always produce profit. Traders are small business owners. Traders sometimes have negative income. On occasion, those losing streaks can stretch into consecutive months. Markets have been our friend for a long while. It does not always work that way.
Ever work 120 hours a week and still have to pay your bills on negative income? Every (real) trader reading this has had to. Damaging the risk/reward profile of investment on the whole, will reduce risk taking on the whole, and thus produce a reduced rate of gross national investment. That's bad for everyone.
Revisions Coming?
While it remains unseen just how much the longevity of this pandemic and potentially higher taxes are priced into the marketplace, I think it justifiable to wonder just how many candy canes and gummy bears are priced into the now consensus 27.9% earnings growth and 14.8% revenue growth, the community of analysts now expects for the S&P 500 for the third quarter. I would think that the failure of the United States and other developed economies to effectively drive down infection rates will force downward revisions both to the just mentioned central view for the current quarter, as well as the 42.6% earnings growth and 14.9% revenue expected for the calendar year in full.
We know that third quarter economic activity has been far slower than initially projected. The St. Louis Fed, though not final yet, actually shows both M2 and M1 velocity of money stock (as a ratio... slowing from Q1 to Q2 despite the fact that the economy was supposedly still pretty hot at the time. It seems - to me - that both economic activity and velocity will perform below potential for as long as a majority of at least the white collar labor force works in some form of decentralized fashion. The deli across the street from the office building, and the coffee stand next to the commuter rail station can not carry on as viable businesses in this environment. I don't see the old normal of performing this kind of work ever returning in full. Large corporations, though probably benefiting from having developed a corporate culture in the past, just have too much to gain in the medium term by reducing their societal footprint in large urban real estate markets.
The counter-view (to my own) comes from none other than the president of Yardeni Research, who is usually correct and I hold in very high esteem. Ed Yardeni appeared on CNBC on Friday, and states that he still sees the S&P 500 at 5,000 by year's end "or sooner." Yardeni plainly says, "I'm not in the corrective camp, but when they (corrections) happen, I hope people use that as an opportunity to buy some more." Yardeni explains that he understands that we are not early in this bull market, and that the market could... "consolidate for a while, instead of having a correction."
Why point out Yardeni's comments? Because he has been spot on to this point with his consistent bullishness, and though remaining so, certainly seems to understand that there is a significant level of increased risk to our short to medium term front. Though I am cautious, I think he is right. Equity markets in my opinion, will go higher in the long term. After failures in policy become apparent, and after TINA returns forced to throw her influence upon financial markets once real rates prove long-term negative.
On That Note...
West Virginia Senator Joe Manchin (D-WVA) made the media rounds on Sunday. That dude was everywhere. A well known fiscal conservative, Manchin was clear. He can not support the larger fiscal spending plan unless the $3.5 trillion pipedreams are whittled down to somewhere between $1 trillion and $1.5 trillion. Certainly out on the fringe, this made heads explode as the far left of the party had started out up around $6 trillion. Manchin also expressed support for a corporate tax rate of 25%.
What do I think? I think there is no tie for Vice President Kamala Harris to break without Manchin and the much quieter, but like-minded Senator from Arizona, Kyrsten Sinema. Either the entire process of reconciliation stops in its tracks at the doors of the U.S. Senate even if a large spending package were to pass in the House, or West Virginia and Arizona end up being promised far more than they had ever dreamed of in terms of their slice of said social and well as infrastructure spending just to get them on board. Very... Well... Played, Senator.
Trading
What am I doing? Maintaining not gargantuan, but elevated cash levels. Not going crazy. Just walking quietly through the jungle with my weapon off safe... but with my trigger finger alongside the barrel. Gold allocated at 10% of investable assets. 5% physical, 5% (adjustable) in "paper gold." Bitcoin is unstable here, Could go up. Could go down. Cryptocurrencies certainly have enemies in regulators who have and are willing to express power over them. If investors flee cryptocurrencies, which is not at all unlikely, the natural landing spot for those seeking alternative ex-money supply assets for that allocation is going to be in precious metals.
Economics (All Times Eastern)
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