Weekly Market Update Highlights
• Strong August retail sales data and surprises from the manufacturing indexes increase the likelihood that the Fed will begin to taper before year end.
• A combination of August’s lower core CPI reading and a lower market suggests that transitory inflation is now priced in.
• House Democrats outlined funding for their reconciliation bill, which we believe may overcome objections to the fiscal stimulus package.
• News about Chinese regulatory changes continued, but the odds of a policy pivot are increasing.
Equities finished mostly lower last week as investors continue to work through economic normalization challenges from the Delta variant, the expectation of Fed tapering, input price pressures and economic data concerns. The S&P 500 (-0.5%), DJIA (-0.1%) and Nasdaq (-0.5%) all fell. Though the economy has slowed, it has not been derailed. Our view is that consumers will drive economic and earnings growth into 2022, and market pullbacks might create buying opportunities.
Market Drivers And Risks
• The CPI reading and retail sales data may alleviate inflation and growth concerns. But economic normalization headwinds due to the Delta variant remain a risk to economic growth.
• Core CPI remained soft in August, increasing 0.1% month-over-month. While this took some pressure off transitory inflation, some of this moderation is a function of the continued spread of the Delta variant. But consumer sentiment may be more resilient, as shown by increasing retail sales across several key categories last month. Headline retail sales were up 0.7% month-over-month. Overall, the recent slowdown in economic data appears to be temporary. Even as we eagerly await clarity on the beginning of Fed tapering, we recognize that monetary policy will remain growth oriented well into 2022.
• U.S. tax and spending plans are in place, but the ultimate outcome remains unclear.
• House Democrats proposed legislation with tax increases that would boost revenues by $2.9 trillion to help finance the $3.5 trillion spending package. At the center of the tax changes are increases in the corporate tax rate (to 26.5% from 21.0%) and the minimum tax on U.S. companies’ foreign income (to 16.5% from 10.5%). The top capital gains tax rate would also rise to 25.0% from 23.8%. While these tax hikes are not as severe as originally proposed, the market is starting to price in the effect on earnings. We continue to monitor the intra-party debate between moderates and progressives.
• China’s regulatory actions lead to further cautious headlines. Macau casino stocks moved lower on concerns about a gambling crackdown.
• Hong Kong-listed casino companies with operations in Macau plunged last week on fears of stricter regulation from the Chinese government. With Macau’s lucrative casino licenses up for rebidding next year, the prospect of more government intrusion hurt a market already reeling from Beijing’s regulatory crackdown on sectors ranging from technology to education and property. Discussions about the future of Macau’s casino licenses have some investors fearing an advantage for Chinese-domiciled casino operators, compared to U.S.-based counterparts. In addition, worries about the systemic risks posed by Chinese property developer Evergrande’s debt troubles are increasing. Between ongoing regulatory changes, challenges in the property sector and signs that the economy is losing momentum, a policy pivot may add support.