Taper talk wobbles the US market
US markets took fright yesterday at the prospect of faster than expected monetary tightening by the Federal Reserve, with the S&P 500 down 2% and the Nasdaq nearly 3%…hang on, I’ve started writing a market report again, better leave that to the experts.
Actually, my short take on yesterday’s price action is that it feels like déjà vu all over again, as the great baseball philosopher Yogi Berra once put it. Fears of the punchbowl being removed have surfaced time and time again in the last few years, especially after the so-called “taper tantrum” in 2013, resulting in the odd fleeting correction here and there. But the party has just gone on, and on, and on – the Fed’s balance sheet has risen from $870bn in late 2007 before the Great Financial Crisis to $8.1 trillion today.
One thing I know about parties is that the longer they go on the worse the hangover is when the music stops, and that’s why the Fed is in such a tricky position: taper asset purchases and raise interest rates, and risk the stimulus-hooked market crashing; do the opposite, and risk the inflation genie escaping its bottle (although maybe that’s what they want to whittle away their mountainous debt piles). It is what us east London folk might describe as “a right old pickle” (or a “bugger’s muddle” if you are from Phil’s neck of the woods).
Anyway, we are where we are, and it is fair to say that the economic outlook which should really determine the level of central bank support in markets is very hard to decipher indeed. The Fed has suggested that the US economy is strong enough to withstand tightening, but GDP forecasts largely reflect a bounce back from Covid and have, anyway, been pared back from earlier expectations. China appears to be retreating from the world, and slowing, and as Bank of America’s weekly flows research puts it, its isolationism “threatens the greatest supply chain in modern history, Chinese producer to US consumer, another big secular inflation catalyst.”
Meanwhile, as everyone in the UK focuses on lorry drivers, I think it’s worth taking a peek at shipping – arguably the arteries of global trade relative to the veins that are Britain’s roads. The Baltic Dry Index – which tracks the rates of the very large ships used to carry bulk commodities – is now at a 13 year high. And the cost of shipping a 40-foot container from Shanghai to New York has risen from $2k 18 months ago to $16k today. In other words, the cost of doing the same amount business as before has risen substantially – extra cost without extra growth.
Such is the concern, some retailers like John Lewis and CostCo – which Phil has written about this week – are chartering their own ships and leasing containers to avoid empty shelves this Autumn and Winter. Next today said that although it pre-bought most of its shipping needs, around 15 per cent of its shipments were affected by the current shipping crunch, adding 2% to per cent to prices. It expects homeware prices to rise 6% next year – thank goodness my sofa arrived this morning.
We’ve made Phil’s view on Next’s strong numbers free to read today, but you’ll have to subscribe to read Phil’s latest views on why, despite the Fed’s punchbowl party, valuations still matter. The potted summary is that various factors, including central bank balance sheet expansion, have meant elevated equity valuations in certain sectors and types of shares to a level that they look very exposed, and that either persistent inflation or a monetary policy response reverses that in favour of cheaper shares. Phil’s put together a new “Jumble Sale” portfolio reflecting this possibility – it may be worth a look rather than risking a hangover by staying at the “Quality” party for too long.