To Taper or Not to Taper: That Is the Question
LPL Research digs into why tapering is a normal part of the recovery process and why they think the inflation threat remains transitory.
Inflation and tapering have dominated the conversation lately and this week in the latest LPL Market Signals podcast, Ryan Detrick and Jeff Buchbinder dig in and explain why tapering shouldn’t really be much of a surprise, while touching on why the inflation threat remains transitory. They also discuss our outlook for stocks the remainder of this year, along with why developed international could finally be looking like a sustainable investment after years of underperformance.
After a huge start to this bull market, Jeff points out that history would say year two will probably be fairly solid as well, but to expect more volatility. Ryan notes that no year two of a new bull market has been lower since World War II and we don’t expect that trend to end this time around. With massive fiscal and monetary policy, along with an incredible jump in earnings, it is tough to say that stocks are ahead of themselves. We think the record jump in earnings helps to justify current levels and likely continued equity strength. However, in the second half of the year, as inflationary pressures build, interest rates potentially rise further, and this bull market gets a little older, the pace of stock market gains will likely slow and come with more volatility.
The Federal Reserve (Fed) minutes opened the door for the possibility of tapering, which seemed to catch some off guard, but Ryan noted it shouldn’t have. Remember, the Fed is buying $120 billion worth of Treasuries and Mortgage Backed securities each month and tapering simply means they will start to buy less each month.
The big worry is if inflation runs hotter than expected, the Fed might be caught behind the 8-ball and will have to hike rates sooner than expected. Jeff points out that tapering sometime later this year is what we do expect and it could be announced later this summer, with the actual tapering taking place in early 2022. With the economy firmly recovering, tapering is only a normal part of the healing process.
Finally Time for Developed International?
Developed International, specifically Europe, has lagged the United States for years, even decades. Jeff points out that Europe could soon see much of the explosive growth that the U.S. and parts of Asia have recently experienced as Europe eventually gets the pandemic under control. Also, he notes that the make-up of Europe is more value-centric, which could be another tailwind as value does better during a reopening. Lastly, Ryan points out that for 20 years, Europe has gone nowhere. From a technical point of view, there could be plenty in the tank for Europe to continue to move higher, as it has formed a multi-decade base.
Tune in now
Listen to the entire podcast to get the LPL strategists’ views and insights on current market trends in the US and global economies. To listen to previous podcasts go to Market Signals podcast. You can subscribe to Market Signals on iTunes, Google Podcasts, or Spotify and find us on the LPL Research YouTube channel.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth in the podcast may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. All indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
All index data is from FactSet.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This Research material was prepared by LPL Financial, LLC.
For Public Use — Tracking: #1-05147158 (05/22)