The Hawks are Circling

Post On: June 23, 2021

Posted In: COVID-19 Market Update

Stocks declined as a surprisingly hawkish (restrictive monetary policy) outcome from the Federal Reserve’s June 15–16 policy meeting and comments from a Fed official about potentially earlier-than-expected rate hikes dragged the Dow Jones Industrial Average lower. The Dow includes many cyclical companies—those most reliant on economic growth. On the other hand, the tech-heavy Nasdaq Composite index posted a much more modest loss. The broad market S&P 500 Index also declined.

 

Large-cap equities held up better than small-caps. Growth stocks easily outperformed value, as investors sold companies in the energy and financials sectors amid fears that the Fed will remove its accommodative policies and raise rates sooner than markets had anticipated.

 

The early part of the week was relatively quiet on subdued trading volumes, as investors awaited the end of the Fed policy meeting on Wednesday. The Fed’s post-meeting statement and Chair Jerome Powell’s press conference were widely viewed as surprisingly hawkish. Policymakers acknowledged that progress on vaccinations has allowed the economic recovery from the pandemic to gain strength, and Powell acknowledged that Fed officials have begun to discuss slowing the central bank’s bond purchases, the first step toward eventually raising interest rates. Powell said that observers could characterize the meeting as “talking about talking about tapering.”

 

The Summary of Economic Projections released after the meeting showed that policymakers now expect two rate hikes by the end of 2023, indicating a faster pace of tightening than in earlier projections. Powell reiterated that high inflation is likely to be transitory, but stressed uncertainty about the inflation outlook.  These comments and the actions that accompany them are important, because they illustrate the politics that have crept into the Fed.  Many are concerned that the Fed could be undermining its credibility in pursuing this new framework of letting inflation run above 2% to achieve full employment without preemptively raising rates.

 

It was no surprise that the Fed meetings also affected the Treasury market. The 10-year U.S. Treasury yield increased sharply after Wednesday’s news, before falling on Thursday and Friday.  Short- and intermediate-term Treasury yields experienced more sustained increases. The difference in yield on five- and 30-year Treasuries reached a lower level than where it started 2021, a trend that could weigh on financial stocks, because banks tend to profit from larger spreads between short- and long-term rates.

 

Scripture is filled with passages and stories involving hawks. In the Old Testament, God asked Job about how and why hawks fly, while making the point that hawks fly according to the laws of nature and not according to the wisdom of man.  Job 39 reminds us that there are things that we cannot control, so we just have to accept them for what they are.  This concept rings true in the markets, although the “wisdom” of man often interferes with the natural progression of economic cycles.  Our wealth management team certainly hopes the Fed “hawks” keep this lesson in mind, as political agendas and other influences threaten to sway their decisions.  As we wait and prayerfully consider our tactical shifts heading into the end of the year, we remember that  “they who wait for the Lord shall renew their strength; they shall mount up with wings like eagles; they shall run and not be weary; they shall walk and not faint” (Isaiah 40:31).

 

 

Sources: Yahoo Finance, Reuters.com, and JP Morgan Market Insights

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This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Information has been obtained from sources believed to be reliable and are subject to change without notification. The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation. Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status and risk tolerance. Past performance is not an indication of future results. Investments involve risk and the possible loss of principal.

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