Thursday, May 27, 2021
To Taper or Not to Taper, That Is the Question
Inflation and tapering have dominated the conversation lately and this week in the latest LPL Market Signals podcast, Ryan Detrick and Jeff Buchbinder dig in and explain why tapering shouldn’t really be much of a surprise, while touching on why the inflation threat remains transitory. They also discuss our outlook for stocks the remainder of this year, along with why developed international could finally be looking like a sustainable investment, after years of underperformance.
After a huge start to this bull market, Jeff pointed out that history would say year 2 would probably be fairly solid as well, but to expect more volatility. Ryan noted that no year 2 of a new bull market has been lower since World War II and we don’t expect that trend to end this time around. With massive fiscal and monetary policy, along with an incredible jump in earnings, it is tough to stay that stocks are ahead of themselves. We think the record jump in earnings helps to justify current levels and likely continued equity strength, However, in the second half of the year, as inflationary pressures build, interest rates potentially rise further, and this bull market gets a little older, the pace of stock market gains will likely slow and come with more volatility.
The Fed minutes opened the door for the possibility of tapering, which seemed to catch some off guard, but Ryan noted it shouldn’t have. Remember, the Fed is buying $120 billion worth of Treasuries and Mortgage Backed securities each month, and tapering simply means they will start to buy less each month.
The big worry is inflation runs hotter than expected; the Fed is caught behind the 8 ball and has to hike rates sooner than expected. Jeff pointed out that tapering sometime later this year is what we do expect and it could be announced later this summer, with the actual tapering taking place in early 2022. With the economy firmly recovering, tapering is only a normal part of the healing process. Ryan ended the conversation talking about his son’s tough U9 soccer loss in the Championship.
Finally Time for Developed International?
Developed International, specifically Europe, has lagged the U.S. for years, even decades. Jeff pointed out that Europe could soon see much of the explosive growth that the U.S. and part of Asia have recently experiences, as Europe eventually gets the pandemic under control. In addition, he noted that make up of Europe is more value centric, which could be another tailwind as value does better during the reopening. Lastly, Ryan points out that for 20 years, Europe has gone nowhere. From a technical point of view, there could be plenty in the tank for Europe to continue to move higher, as it has formed a multi-decade base.
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