Tapering The Taper Talk

Jackson Hole is this week and normally this would be a big deal, but it’s hard to imagine we get anything notable out of this meeting. There are those looking for some signals out of the FED that tapering of asset purchases will start before the year is out. We got some hints to that from the Aug 18 minutes release for the July meeting….

Of course, the overall macro picture has shifted since late July…

Notably Covid has had a Delta spike with ICU hospitalizations tripling since the Fed last meeting

While this has not translated into domestic lockdowns, it has resulted in many firms delaying back to the office plans till the start of 2022. States are also all over the place with respect to mask mandates, vaccine passports, and other covid related measures. There is also heightened anxiety around back to school, and debates around vaccination for kids and booster shots for at risk individuals. Globally you are also varying degrees of delta related restrictions, and this has taken notable wind out of the travel recovery sails.

China also recently experienced its biggest air travel drop since the start of covid, and airlines globally have seen forward bookings dip. The TSA also recently extended the mask mandate that was set to expire Sep 14 until Jan 14. All in all you have a reopen air pocket without the lockdown consumer behavior, and its occurring right as pandemic era unemployment assistance is ending.

On September 6th, the Federal Pandemic Unemployment assistance is set to expire. There was some speculation as to whether this would be extended, but it’s now official that the program will end in two weeks. Not exactly the biggest news as 26 states chose to end this assistance early in June/July, but the aggregate number expiring in September is about 6x what has run off in the last two months. (note some of this may be blunted by tapping what’s left of $350bl America Rescue funds 4 certain states though this seems limted)

As of last week’s DOL report there will still 8.6 million people receiving this assistance at the end of July versus slightly more than 11ml at the end of May.

What will this impact be?

There is a good paper that has looked at the data in states where Pandemic assistance was canceled early to help alleviate labor market shortages. Their general conclusion is that these people did not find work quickly, and thus reduced their consumption by roughly half of the lost $300 immediately.

The aggregate numbers are not huge but when you consider spending multiplier affects and the expectation that no more stimulus is forthcoming; this is a headwind for the economy. Also, the eviction moratorium is set to expire on October 4th.

Put these two together and I doubt the Fed will want to talk taper this week. They also have an easier market environment. SPAC’s have been decimated over the last two months, nobody is pitching the next meme squeeze trade anymore, and IPO’s for the most part have seen their returns diminish notably with 65% of all IPO’s of the last 12 months trading at +10% or less from their issue price. Commodity mania has also cooled off with WTI 15% off its last fed meeting high, and many other notable commodities that had been grabbing headlines cooling off.

So, I think the Fed will essentially toe the line and point to their transitory wins while emphasizing the Delta situation has maybe added some economic headwinds that might push their path to tapering out a bit.

How will markets react to this in the week ahead?

Well, I don’t really think this view is going to surprise anyone so its kind of consensual at this point. The indices are sitting at all-time highs essentially with mega caps doing well and tech/retail/financials generally on cruise control. The weakness of late has been in travel/leisure/cyclicals/biotech and a certain subset of covid winners. So, outside of betting on a rotation (note i’m in this camp) back into those names as delta fades you really need to be more of a stock picker in this environment. Because you can’t exactly be like I’m going to buy Msft/Goog/Aapl here because there will be no taper this year as they generally cruised through the summer volatility. Maybe you can fish in some software names that have lagged a bit (wday/pd/crm/splk come to mind), but beyond that you’d really need to want to buy crappier beta if u wanted to trade this. It’s also very hard to not be wary of narrowing leadership when you’ve had a market like the one we have had the last year. So, if you have names that are up huge ytd, this is probably a good time to reduce them relative to solid businesses you own with somewhat sensible valuations that have underperformed. And if you have a strong conviction on the path Delta takes from here based on the data, well there is a long list of names you can buy with different degrees of levg to this last wave being the end of covid. (note I’m long bkng/ba as my way of playing this) So get ready for some rotation.