Tough Love

By David Nelson, CFA CMT

The Fed last week scraped together just enough tough love prove they have investor’s backs on a range of issues. A taper that is likely to be announced in November could easily take until mid-2022 and there is all but a promise of no rate hikes until the end of that process. The coming announcement of a taper at least shows Jay and company aren’t asleep at the wheel but still face an enormous challenge attempting to balance the market’s addiction to low rates while at the same time dealing with rising inflation expectations.


FedEx (FDX) earning’s release last week gave us a grim reminder of what inflation can do to the bottom line. Management pointed to the heart of the problem a $450 Million cost impact – tied to wages forcing a cut in guidance. Expect more of the same as the earning’s parade kicks off in a couple of weeks.

With all that as a backdrop the markets closed out the week with 3 back-to-back days in the green to more than erase last Monday’s fall.  Reclaiming the high ground sitting just north of the 50-day moving average the market needs to convince investors it can start living above that line.

With Fed day behind us investors will shift their focus to congress as the administration tries to save a $3.5 Trillion package. With only a small majority in the House and no wiggle room in the Senate Democrats need to bring together competing factions within the party.

ETF equity fund flows were decidedly negative last week despite the broad market closing in the green. The weakening outlook for a meaningful infrastructure package has translated into weak relative performance of popular infrastructure ETFs (IFRA) iShares US Infrastructure and (PAVE) Global X US Infrastructure Development over the last month. Could be just noise and both could easily bounce back with the passing of a meaningful infrastructure plan.

S&P 500 vs IFRA vs PAVE 1 Month

With earnings still a few weeks off the economic calendar takes center stage. Durable orders on Monday are expected to come in at 0.8% a pickup from last month’s negative number. Also on deck is consumer confidence and the final estimate for Q2 GDP expected to be 6.6%.

Estimates for the current quarter GDP have been falling for weeks. More deterioration in this data point is going to force cuts across the board on a range of industries. 


Despite the challenges the biggest risk to earnings is still tax hikes. Currently the administration is considering a large number of tax increases including a corporate tax hike from the current 21% to 26.5%. In a recent note Goldman’s David Kostin puts the odds of a hike in 2022 at 76% and that each 1PP hike translates into a 25-basis point reduction in Return on Equity (ROE). For the moment the TINA principal (there is no alternative) is still the best friend equity investors have.

*At the time of this article some funds managed by David were long FDX