By David Nelson, CFA CMT
A return of Covid restrictions and the inevitable reduction in economic activity is still the biggest risk investors face and in part likely explains some recent behavior in fixed income markets. As the Wall Street Journal points out virus cases are on the rise especially in parts of the country where vaccination rates are low. The CDC has reversed course and now suggests even vaccinated people resume masking indoors. Apple (AAPL) has come out and said that they will require masks in many of their retail outlets.
Dr. Anthony Fauci – Time to step down
Dr. Anthony Fauci made the rounds on some of the weekend news shows pushing for the return of masks including children under 12. He’s been the most visible spokesperson on a range of Covid issues including vaccines, research, masking and social distancing. The controversy’s regarding NIH funding to the Wuhan laboratory through the Eco Health Alliance along with inconsistent messaging aren’t going away.
Respectfully, the administration needs a new medical voice. Whether justified or not Dr. Fauci has lost credibility with a significant number of Americans. It doesn’t matter if they are right, wrong, or misguided. Many of them are the very people you are trying to convince to be vaccinated.
I’ve been vaccinated and likely most reading this have been. We know it isn’t a panacea but believe it was the best choice given what we know. Others may choose not to vaccinate for a variety of reasons. Young women of childbearing age may decide against fearing it may affect their children or their ability to give birth. Some may have immune disorders and uncertain what the introduction of a still not approved vaccine may do. Others might just be afraid. The reasons don’t matter.
If the goal is to get the participation rate higher giving us a better shot at herd immunity, put politics aside and get a new messenger. This is a campaign, and every politician knows when the polls are sagging it’s time to shake up the campaign staff.
The Street
Most bulge bracket firms have 10-year yields closing well above 2% by the end of the year despite the recent back off in yields across the curve. Logically a push higher in yields along with a steeper curve looks correct in every sense except price. Bond bulls have successfully mounted a counter trend rally flattening the curve and at the same time turned the reflation trade upside down. A temporary reversion to the mean or a warning that current estimates for both 2022 earning’s and GDP are too high?
Taper Calendar
That’s the debate that is going to drive equity markets over the next several months. Add the fact that the FOMC is however slowly getting markets ready for the inevitable Taper and all the baggage that comes with it. The language from the Fed is slowly morphing and as Goldman’s David Kostin points out something of a compromise to hawkish members. Goldman’s calendar probably is a good representation of where the street is placing its bets and currently suggests the first hint of tapering will come at the September meeting and the first real reduction in 1st quarter 2022.
Covid still hangs over markets like a wet blanket and the CDC’s call for a return to masks has to weigh on investor outlook.
84% of the market cap of the S&P 500 has reported with most of the earning’s beats coming from Technology and Consumer Discretionary. As always, the first week of the month is a heavy economic calendar culminating Friday with a look at July non-farm payrolls. Current consensus is 900K and anything less could rekindle the debate on the current health of the recovery.
*At the time of this article some funds managed by David were long AAPL
