The Volatile Tightrope Walk
After the relative calm of early July, the last two weeks havebrought back fireworks of a different kind. So far, during the second half of the month, an increasingly bipolar market has served up volatility in large portions. Equities, commodities, andbonds have all caught the volatility bug.
Stocks welcomed the week with panic selling before making new all-time highs. Oil was in freefall with a nearly 10% breakdown by Tuesday, but finished higher for the week. After reaching 1.42% on July 13th, 10-year Treasury yields absolutely collapsed on Monday to 1.19%, the lowest level since February, before bouncing back to nearly unchanged on the week and closing above a rising 200–day moving average.
Two-way volatility in all its glory was firmly on display. The only markets seemingly immune to the outsized volatility this week were gold and the US dollar. However, in light of the upcoming FOMC meeting, I doubt these two markets will stay docile for long.
Expectations for the Fed meeting are that Powell and company will start more serious discussions about when and how best to scale back the ultra-easy monetary policy regime that’s been in place since the Covid crisis began in 2020. The answers to those questions may prove complicated and tricky for the Fed,considering a rapidly growing but fragile economy, the new Covid Delta variant threat, an underperforming jobs recovery, an everything bubble in markets, massive debts, and a strong and stubbornly persistent inflation genie threatening to breakout of the bottle. This is certainly a tough spot for the Fed.
Fed officials have already made clear that their intentions are not to consider raising interest rates until after they wind down asset purchases. What if, however, the taper doesn’t go so well and produces another tantrum? What if the Delta variant takes hold and undermines economic growth? Will the Fed push forth with tightening amidst an aggressive market sell-off and another economic scare?
History would suggest they will not, but now, with a meaningful, so far non-transitory inflation issue to deal with, the situation becomes ever more complicated. The market volatility we saw in the wake of the last Fed meeting and again over the last two weeks may become a persistent trend going forward,reflecting the angst of a market trapped every bit as much as the Fed.
The idea held by many that the path forward for the Fed, the market, and the economy is straightforward and easy seems very likely to be overly simplistic, wishful, and mistaken. Further complicating matters is the increasingly viable idea that, while exceptionally strong, propelled by unprecedented monetary and fiscal stimulus, this recovery cycle may end up being just as exceptionally short.
Many economists, including those surveyed by the Wall Street Journal this week, have started to suggest that we are now past the peak growth of this recovery. While an accelerated recovery cycle that’s already past peak growth might not necessarily be a bad thing, it might complicate the position of a Fed that to date has not even backed off the accelerator and is facing an inflation problem.
Confidence in the Fed’s ability to walk the tightrope perfectly is also showing signs of erosion. The Fed has started to look wrong on inflation. Even if inflation eases off a bit from here, the Fed has clearly been surprised by the strength of the inflationary impulse and in its persistence to date. Compared to the bold bravado they showed in dismissing inflation outright over the past months, they are now showing at least some signs of awareness that they have gotten some things quite a bit off.
This was also on display in Congress last week when lawmakers appeared to be losing patience with the Fed. They seemed more frustrated and willing to try and rein in a Fed that appears increasingly out of touch with reality than at any time I can remember in recent years.
The uneasiness in Congress may reflect a similar uneasiness expressed in recent bouts of serious market volatility. For markets, this is not a good time for a chink in the armor of the “flawless Fed” perception. Nobody wants a crisis of confidence ahead of a crucial, difficult period.
The many that believe this tightening cycle is straightforward and routine may be engaged in wishful thinking. That sort of economic analysis sounds to me like the soothing sounds of elevator music when the markets are starting to play jazz. I think the recent trend of increasing market volatility is the market telling the truth about a complicated economic and financial moment. It may be an increasing trend that’s with us for a while.
As for weekly performance: The S&P 500 closed the week up 1.96%. Gold lost 0.73%, and silver was down 2.19% on the week. Platinum took a hit to the tune of 4.25%, while palladium was up 0.95%. The HUI gold miners index was off 2.34%.IFRA, the I Shares US Infrastructure ETF, was up 0.77%.
Energy commodities were higher in a volatile week. Oil managed a weekly gain of 0.71%, while Natural Gas prices exploded higher by 9.99%.
The CRB Commodity Index was up 2.05%, while copper was up 1.85%. The Dow Jones U.S. Real Estate Index ended the week up 0.45%, while the Dow Jones Utility Index lost 1.10%. The dollar gained 0.24% to close the week at 92.93. The yield on the 10–year Treasury lost 1 bps to close a wild week at 1.30%.
Have a great weekend!
Chief Executive Officer