Should President Biden stick with Powell as Fed chair or go with someone else?
Daniel Acker/Bloomberg
This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Powell or Brainard?
Special Commentary
Wells Fargo
Sept. 16: Jerome Powell’s term as chair of the Federal Reserve is scheduled to end in February, and President Biden will need to decide whom to nominate. Should he stick with Powell or go with someone else?
Online betting markets give Powell a probability in excess of 85% of being renominated, with Fed Governor Lael Brainard a distant second at roughly 10%. These probabilities seem reasonable to us.
In our view, there is little difference in the monetary-policy views of Powell and Brainard. The latter has never dissented from a Federal Open Market Committee decision in her seven years on the Board of Governors, and we would classify both as “dovish.”
There is more difference in the regulatory views of the two front-runners. Brainard has dissented 23 times since 2018 on regulatory-policy votes. Her dissents have largely come on votes relating to the easing of regulations that were put in place in the wake of the 2008 financial crisis.
A stricter regulatory environment, should one be adopted, could potentially exert some marginal downward pressure on loan growth. That said, it likely would take a radical change in regulatory policy, which does not appear to be in the offing, to have a discernible effect on lending and the economic outlook over the next few years.
We would not be inclined to make any changes to our economic outlook if President Biden chooses either Chair Powell or Gov. Brainard.
—Jay H. Bryson, Sarah House, Michael Pugliese, Hop Mathews
Bearish Sentiment: Bullish Sign
The McClellan Market Report
McClellan Financial Publications
Sept. 16: With rising worries about September’s bad reputation for the stock market, and with a small drawdown in stock prices, investors seem to have suddenly turned a lot more bearish. That bearishness constitutes fuel for sustaining an uptrend, as all of those bears will turn into buyers as they flip back to a less bearish stance.
Some analysts like to track the spread between bulls and bears in the weekly AAII [American Association of Individual Investors] Investor Sentiment Survey, and I watch that, too. But I also find that looking at each of them separately can be useful.
[The latest reading] is the highest reading for the bearish percentage since October 2020, when we were still just recovering from the Covid crash and investors were still terribly pessimistic. This is a bottoming sort of indication for stock prices….Normally, it takes actual downward price movement to turn people to a more bearish state. We haven’t had much of that this time. I suspect that the rise in bearishness this year has been fueled by more discussion than normal about weak seasonality in September.
—Tom McClellan
Dollar Weakness Ahead
The Market Strategy Radar Screen
Oppenheimer Asset Management
Sept. 13: The Bloomberg Dollar Index, a weighted basket of the top 10 U.S. trading- partner currencies, had appreciated in recent weeks to record a new high for 2021 on Aug. 20. The index has since slid 0.87% from that high through Sept. 10. Notwithstanding the greenback’s recent slide, the dollar is up 2.25% from the start of the year.
As a result of the relative strength of the dollar for much of this year, foreign equity market returns for U.S. investors have been reduced for much of the year thus far.
However, our expectations remain for the dollar to trend lower as vaccines start to stem the spread of Covid-19 more widely across the globe and as the U.S. moves toward a sustainable economic expansion that leads the global economy toward a recovery. As a result, currencies of foreign exporting countries could be expected to strengthen against the dollar on rising demand for imported goods from U.S. consumers and businesses.
—John Stoltzfus and team
Why Inflation Will Moderate
The Independent Market Observer
Commonwealth Financial Network
Sept. 14: One of the most urgent and consistent questions I have been getting is around inflation. With the headline numbers high, the concern is that we are moving back to the 1970s and that inflation will stay at the current 5% or run even higher. That conclusion seems reasonable, given the large federal deficit and spending over the past couple of years. When combined with the signs of slowing growth, it could point back to stagflation. The 1970s are calling. Maybe disco will come back, as well.
All of this could happen, and there are signs that inflation will start running somewhat hotter in the next couple of years. But I am still unconvinced that the 1970s are back. We have high inflation numbers, but we also have good reasons to believe that those high numbers won’t persist for much longer. We have backward-looking data that look scary, but the forward-looking trends look better. And we have slowing growth, but that slower growth is just getting back to the prepandemic normal, which is arguably what inflation is doing, as well….We will likely see inflation run hot for at least the rest of the year and quite possibly into 2022. But we see the change in trend, which shows that the economy is healing.
—Brian McMillan
The Case for Industrials
Blog
William Blair
Sept. 13: Our overweight to industrials is unique for growth investors, but there are good reasons for it. These companies offer high barriers to entry, strong and durable competitive advantages, and a long runway for growth. Moreover, environmental, social, and governance, or ESG, considerations can strengthen their advantages….
Many industrial companies’ stocks can be volatile because the market tends to overreact to economic cycles. This can create opportunities for active managers to deploy capital into mispriced value creators and protect value when the market is too enthusiastic over the near term.
Aerospace is a good example. The Covid-19 crisis nearly halted air travel, and market values of aerospace stocks fell 60% in a month. This created a once-in-a-generation opportunity to buy what we believe are some of the best industrial assets in the world at a significant discount to intrinsic value. We expect growth in aerospace to return to trend as health concerns recede and the removal of restrictions releases pent-up demand for travel. Over the longer term, we believe that secular growth in aerospace will be driven by a growing middle class in emerging markets, greater affordability, and an overall shift in spending to services.
—Ken McAtamney
That’s Bananas!
PWM Weekly Observations
Polumbo Wealth Management
Sept. 11: There are many signs of market excess, and this is one of them. A collection of 101 Bored Ape Yacht Club nonfungible tokens sold for over $24 million this week.
Unbelievable! Maybe we are just too old to appreciate the value of NFT’s, but we also recall “scarce” $5 beanie babies reselling for thousands of dollars in the late 1990s. Needless to say, they no longer sell at such premiums. The similarity is that the late 1990s was also one of market excess, so excuse us if we are skeptical about the value of the apes. That’s right. $24 million for 101 digital pics of apes. If you’re confused, welcome to the club.
—Philip G. Palumbo, Doug Augenthaler
To be considered for this section, material, with the author’s name and address, should be sent to [email protected].
