by Bryan Perry

June 22, 2021

Most investors are keenly aware that the market hates uncertainty, so they understand why the indexes tend to buckle when there is a lack of information to provide clarity. Last week’s FOMC meeting and policy statement provided what most thought (at first) was a great dose of certainty.

The Fed emerged from their two-day FOMC meeting with a few changes in policy and their economic outlook, namely: The Fed will continue their quantitative easing of $120 billion per month, consisting of $80 billion in Treasury securities and $40 billion in mortgage-backed securities. The Fed is also going to maintain their 0% interest rate policy through the end of 2023, which has been pulled forward from 2024.

The Fed also raised their forecast for real GDP growth from 6.5% to 7.0%, and their inflation forecast for 2021 from 2.4% to 3.4%. The Fed has been working toward a modest inflation goal of 2.0%+ for years and, with the help of a pandemic-related set of commodity bottlenecks, has now overshot that target.

Regardless of what was initially received as an “accommodative” and transparent message, the market’s reaction turned progressively worse by week’s end, with the S&P 500 paring 2.1% off Tuesday’s high.

On Friday, the S&P 500 and Russell 2000 also fell below their 50-day averages, while the Dow fell to its lowest point since April 1. The week ahead is technically important for the market. Per this chart of the S&P 500 SPDR (SPY), there have been several instances with a technical breach of the 50-day line. S&P 500 SPDR Barchart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Each time the 50-day MA has been breached in recent months, the market has righted itself and resumed its primary uptrend. I suspect this time will be no different. High levels of liquidity, stock buy-backs, M&A activity, improving global COVID-19 data, solid economic data, and accelerating sales and earnings should limit the risk of anything more than a garden variety pullback.

With that said, sometimes logic and rational thinking temporarily escape the trading pits – when traders think “the market has it wrong.” And sometimes it does, especially when it gets suddenly confused. For instance, St. Louis Fed President James Bullard made some pre-market comments going against the Fed’s official policy statement, released Wednesday, that caught Wall Street flatfooted and totally confused.

Investor sentiment turned sharply negative after Bullard told CNBC that he was one of the seven FOMC officials on Wednesday that expected a rate hike in 2022 rather than later, and that the Fed shouldn’t be involved in mortgage-backed securities. (Bullard was often seen as one of the more dovish Fed members.)

For a non-voting member of the Fed to throw that curve ball at the market on a quadruple-witching-options-expiration Friday – in what is already a seasonally weak time of the year – felt like a sucker punch that triggered late-week selling across the board. Value and cyclical stocks were dumped from the opening bell by investors in an environment where inflation/growth rates could be peaking, as the economy moves past the initial reopening phase and the Fed sounds less dovish. Big-cap tech held steady as money rushed back into FAANG plus a few big software stocks, but no sector escaped unscathed.

Weekly Sector Performance Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Adding to the confusion, bonds staged a strong rally, pushing the 10-year Treasury Note yield down to 1.45%. Even more pronounced was the drop in yield in the 30-year Treasury Bond down to 2.02%.

Some of this pressure was simply a flight to safety as the algos were tripping sell program triggers, but the dramatic move lower in yield again confused traders and investors about such a counter-intuitive move – especially if the economy is truly picking up speed, as the Fed’s narrative suggests. 30 Year Treasury Bond ($TYX) Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This week’s economic data should help provide some clarity on recent economic activity from both businesses and consumers. It will include updated readings on the housing market and the manufacturing and services sectors. Existing home sales and new home sales for May will be released on Wednesday. Manufacturing and services purchasing managers’ indexes (PMIs) are also due Wednesday. Thursday’s data releases will include revised Q1 gross domestic product (GDP), while Friday’s data will feature consumer spending for May and consumer sentiment for June, concluding a jam-packed data week.

Ultimately, economic data and quarterly results are what the market cares about most, and in both cases, the numbers should be quite bullish, but herky-jerky markets induced by a Fed that is not singing off the same sheet of music makes for a nervous investing landscape. Bear in mind, however, that any future Fed moves will be nominal and well telegraphed. Considering the level at where the S&P 500 is now trading, a lot of fuss was made last week over a 2.3% decline.

Each time the market has experienced a hissy fit like this, it’s been a timely opportunity to buy the best dividend growth stocks that temporarily go on sale. With bond yields back down, the attractiveness of blue-chip dividend growth just became a golden investment proposition for the second half of 2021.

Stock selection is also at a higher premium than it was a month ago, and the best dividend stocks have given investors a very brief moment to buy them on sale.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
Commodity Inflation is Coming Under Control

Income Mail by Bryan Perry
Confusion is a Major Market Nemesis

Growth Mail by Gary Alexander
The Grand Experiment in “Funny Money” Continues

Global Mail by Ivan Martchev
The Fed’s “Untaper Tantrum”

Sector Spotlight by Jason Bodner
Why I Am Ignoring Last Friday’s Market Mess

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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