Stableford Capital—August 2021 Review: 3 Key News Items From August
Summer is (unofficially) over, and the kids are back to school. Hopefully, you were able to get away and enjoy yourself for a while. In case you missed it while on vacation, there were some key news items during August.
The first is the Fed has—in no uncertain terms—informed investors that it will begin to taper its bond purchases. There is still debate regarding the timing, but it is likely sooner rather than later. Notification is the first step towards normalization of interest rates and it is worth noting that the Fed has successfully executed the messaging. The next step will be managing expectations regarding the timing and speed of the taper—but everyone knows it is coming. The big risk to the Fed from here is that inflation is not “transient” and they surprise markets with faster-paced tapering or rates moves to offset it.
The second news item of note was the negative surprise to the Michigan Consumer Sentiment survey which at 70.3 was the lowest level since 2011 (Exhibit 1). What drove the precipitous drop from 81.2 in July? Covid. Specifically, the Delta variant surprised many with the alacrity with which it spread.
Consumer Sentiment Rapid Drop to Levels not seen in 10 Years
Rapidly dropping consumer sentiment can lead to reduced consumer spending, a key risk to an economy that is 70% driven by consumers. So far though, investors are shrugging it off, believing that Delta variant cases have peaked, as evidenced by the continued increase in interest rates. The 10 Yr. U.S. Treasury yield increased from 1.22% to 1.31% in August.
Rates Increased Off Recent Lows In August
Leisure/Hospitality and Education Employment Miss the Mark in August
The third big news surprise was August payroll gains of only 243K, missing expectations by nearly 400K—a huge miss. The Delta variant was once again the culprit as sectors outside of leisure/hospitality and education were largely as expected. But leisure/hospitality and education missed widely as shown in Exhibit 3.
The equity markets did not take a hiatus in August, climbing the “wall of worry” again to a 3% gain for the S&P 500. Breadth was once again narrow, with large-cap tech leading the way.
Equities Up In August
As we pointed out last month, the narrowing breadth of the market earnings revisions has made it vulnerable. That said, so far the Fed has managed to thread the needle with its taper message and the upward move in rates has not bothered equities much. We will see if this can continue as fall has historically been a precarious time in the equities markets
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