by Louis Navellier

September 28, 2021

The biggest surprise from last week’s Federal Open Market Committee (FOMC) meeting and statement on Wednesday was that Fed Chair Jerome Powell didn’t hint at any start date! The statement was much more dovish than I anticipated since it did not give a clue about when the Fed would begin to taper QE.

This is the entirety of his coverage of “tapering” in his 4-page, 1,250-word statement on September 22:

“We also discussed the appropriate pace of tapering asset purchases once economic conditions satisfy the criterion laid out in the Committee’s guidance. While no decisions were made, participants generally view that, so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate.”

–Fed Chair Jerome Powell, September 22, 2021, FOMC Statement

In my opinion, the Fed can finally start tapering its quantitative easing (QE) sooner rather than later, since international capital continues to flow into the U.S. in the wake of China’s growing real estate crises, which are escalating as defaults mount. The bottom line is that since the U.S. is not yet characterized by negative interest rates, our Treasury securities remain an oasis for international capital, which is why the bid-to-cover ratios at recent Treasury auctions remain healthy, reflecting robust demand.

When it comes to interest rates, the FOMC expects to make one 0.25% key interest rate hike in 2022 and up to three 0.25% rate hikes in 2023. The Fed also lowered its 2021 GDP forecast to 5.9% (down from 7% in June) and it is also forecasting 3.8% GDP growth in 2022. The FOMC also raised its core inflation target (based on the Personal Consumption Expenditure index) to 3.7% for 2021, up from 3% previously forecasted, and 2.3% (up from 2.1%) for 2022. Clearly, the Fed is anticipating more inflation than before.

I am still anticipating quarter-end window dressing to boost most powerful growth stocks that sport strong forecasted sales, earnings, and positive analyst revisions, which typically precede future earnings surprises. October has been a seasonally strong month in the past 30+ years, and November is even stronger. Essentially, what happens in the fall is that consumers cheer up as the holidays approach. When we gather with family and friends during Thanksgiving and other holidays, consumer sentiment naturally rises. When consumer sentiment rises, investor sentiment also improves, which is why year-end rallies are common. Additionally, there is a lot of year-end pension funding, which typically starts by Thanksgiving.

I expect any proposed tax increases will fizzle due to the infighting over SALT deductions and Senator Joe Manchin’s resistance. I must say that I was relieved to see that the House of Representatives proposed a much smaller increase in the long-term capital gains rate to 25% (from 20%), which is substantially less than the 39.6% tax that the Biden administration originally proposed. The fact that the House proposed a smaller tax increase is a sign that they know that increasing taxes can be suicidal heading into the 2022 mid-term elections. As the Biden administration’s popularity plunges in the wake of the escalating border crisis, the bungled Afghanistan exit, and criticism from allies (such as the British Parliament and French President Macron), I suspect that very little will get done in Washington D.C. in the next few months.

The Latest Housing Statistics Reflect Major Shifts in Demand

Last Tuesday, the Commerce Department announced that housing starts rose 3.9% in August to an annual rate of 1.615 million, well above economists’ consensus estimate of 1.555 million. In the past 12 months, housing starts have surged 17.4%. Unfortunately, single family housing starts declined 2.8%, to an annual rate of 1.076 million as multi-family starts surged 21.6% to an annual pace of 530,000.

As a case in point, California recently passed a law allowing multi-family home development (up to 10 units) on lots designed for single family homes in an attempt to reduce the state’s high housing prices. It will be interesting to see how this change will boost multi-family housing starts in the upcoming months.

The next day, the National Association of Realtors announced on Wednesday that existing home sales declined 2% to an annual rate of 5.88 million. In addition, they said there are now 1.29 million homes for sale, representing a 2.6-month inventory. This tight inventory and high median home prices are starting to hinder existing home sales. However, due to tight inventories, home prices are expected to remain high.

On Friday, the Commerce Department announced that new home sales rose 1.5% in August to an annual rate of 740,000. Also, July’s new home sales were revised up to an annual pace of 729,000 from 708,000 previously reported. New home sales surged 6% in the South, 1.4% in the West, and a whopping 26.1% in the Northeast, but sales declined 31.1% in the Midwest. In the past year, new home sales have decreased 24.3% and median home prices have risen 20% to $390,000, as affordability issues have cut into sales.

In other news, the Labor Department on Thursday reported that new claims for unemployment rose to 351,000 in the latest week, up from a revised 335,000 in the previous week, while continuing unemployment claims rose to 2.845 million from a revised 2.714 million in the previous week. Both numbers were significantly higher than economists’ consensus expectations of 320,000 and 2.6 million.

In light of these deteriorating numbers, I find it interesting that the Fed now seems more preoccupied with inflation over unemployment, as the economy has lost approximately five million jobs since March 2020.

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

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Louis Navellier

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