Since last November the market has traded in a very defined channel which is become more narrow. Importantly, there is a “dearth of buyers” as volume collapses on rallies with volatility spikes becoming more suppressed. At some point, the market will break out of this channel and there will be a big move in whatever direction that is.
We suspect that move will be lower as volatility returns to the market.
A Historical Deviation Extreme
Using Shiller’s monthly inflation-adjusted data from 1900-Present, the S&P 500 is more extended from the long-term exponential growth trend that at the peak of the markets in 1903, 1929, and 1999.
This time is truly different.
Fading The Delta Variant
Markets jumped earlier this week upon the announcement the Fed’s Jackson Hole conference is virtual. The market’s assumption being the Fed is worried about the variant and therefore likely to downplay taper given new vulnerabilities to the economy.
The reality is that new Delta cases appear to be falling.
The graphs below from IHME/University of Washington show confirmed infections are stabilizing or declining and IHME’s estimates are also moving lower.
Biden’s Approval Rating
The graph below, highlighting President Biden’s declining approval rating, is an important macro factor emerging on the horizon.
There are two points in regards to his ratings worth keeping an eye on.
First, Biden will try to improve his ratings. Will he push legislation for even more fiscal stimulus or other economic boosting measures to win approval? In a similar vein, will he back off on tax increases?
Second, will some Democratic Senators and Representatives, especially those facing tight reelection campaigns in a year, start to shy away from the President? If so, winning their votes for infrastructure, the budget, or anything else will become tougher.
Savings Rate Normalizing
The savings rate spiked early in the pandemic due to the abundance of fiscal stimulus sent directly to individuals along with less consumption as important segments of the retail economy were shut down. Since then, additional savings and further rounds of stimulus boosted consumption and nominal economic growth to levels last seen in the 1950s. Both sources of economic activity are coming to an end which helps partially explain why consumer confidence fell sharply last month and retail sales have been weak.
The economy is slowly but surely being left to stand on its own legs. Will the Fed hold of tapering QE as economic reality emerges?
The graph below from Arbor Research provides a clue for the recent decline in consumer confidence.
Based on Google search data, the term stagflation is now the leading ‘flation search word. Stagflation entails weak economic activity coupled with inflation. Stagflation results in higher unemployment and negative real wage growth.