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@theMarket: Taper Talk Tanks Stocks

By Bill SchmickiBerkshires columnist
The July minutes of the last FOMC meeting were released Wednesday. In the announcement, Fed officials expressed their willingness to start reducing asset purchases before the end of the year. In response, traders dumped stocks. Was that the right move?
 
Stock jockeys seem to believe that by reducing monetary stimulus by even a smidgeon, all will be lost in the stock market. I find that hard to believe. The Fed is purchasing $120 billion a month in bonds. If they reduce that amount by $10-$20 billion, that still leaves a lot of central bank firepower.
 
A much better explanation for the losses this week could be that it is a slow week, and a seasonally treacherous time of the year in the equity markets. Traders can move stocks up and down easily on little volume, racking up big losses (and gains) from unsuspecting investors.
 
Add into that mix, a host of unknowns ranging from the latest surge in the Delta variant of the coronavirus, events in Afghanistan and China, plus the upcoming battle over the debt ceiling, and you have a genuine witches' brew of misinformation, fear, and worry. Oh, and did I happen to mention that all this is occurring at the very top of the markets?
 
Let's begin with the Fed's statements. Nothing, absolutely nothing, in the minutes was new information. I have been writing about this upcoming taper for weeks. Everyone knows it is coming by now. It is only a question of how much the Fed plans to taper and when.
 
The fall of Afghanistan and the rise of the Taliban may hurt American pride, and possibly damage our credibility among allies and our enemies, but that's about it. Talk of increased terrorist activity as a result is a bit much, and no reason to sell stocks, unless you own an Afghanistan country fund (of which there are none). But again, it was a slow week in the markets.  
 
The ongoing decline in American-held Chinese stocks is a horse of a different color, however. A month ago, I warned readers that Chinese stocks traded in the U.S. and abroad would face a massive re-rating as a result of the actions of the Chinese government. Many Chinese stocks have declined by 50 percent or more since my column.
 
I have watched as investors bought every dip (just like they have done in the U.S.), thinking they were buying quality stocks at a bargain, only to see prices fall even further. Investors need to understand that the Chinese government is a communist and not a capitalist system. They could care less how much you lose on their way to achieving their political and socialistic goals over the next five years and beyond. Chinese equities may have a dead cat bounce soon, but the risk is still real, and will continue to pressure these stocks.
 
Another threat I have been taking seriously is the ongoing COVID Delta variant. My concern, aside from the health risk to everyone, is the Delta variant's potential impact on the global economy. We are starting to see additional supply line bottlenecks forming throughout the world, causing a scarcity of parts and products.  Consumer sentiment is also retreating. Retail sales, however, still seem to be okay but have cooled somewhat in the last week, according to Bank of America's debt and credit card spending data.
 
This week, medical experts revealed that the efficacy of the vaccinations we have already received may be becoming less effective in preventing coronavirus infection as time goes by. U.S. health officials on Wednesday announced plans to dispense Covid-19 booster shots to some Americans starting in September 2021 (for those with certain underlying health conditions). Bottom line: we are still at the mercy of this pandemic, and until a large percentage of these anti-science citizens in mostly southern states get with the vaccination program, we will never get out from under. 
 
The Afghanistan mess does muddy the waters somewhat, at least as far as the timing of the debt ceiling debate. Congress still needs to debate and pass the $3.5 trillion budget proposal through the reconciliation process as well.
 
I have been surprised by how well the markets have been handling all of these challenges. Markets snapped back on Friday somewhat, however, we will need to wait until next week's outcome of the Fed's Jackson Hole Symposium before signaling an all-clear in the short-term.  
 
The small-cap, Russell 2000 Index and the Dow Transportation Index have already declined a good 9 percent over the last few weeks. I suspect that somewhere down the road, the main averages will follow them down but thus far, unlike the Chinese stock market, it has paid to buy every dip. Stay invested.
 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.

 

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