Good morning.
There’s not a lot of trading action at the moment. Stocks are pretty chill, as are real rates ahead of today’s closely watched Fed press conference. Investors have been waiting for this day for months, expecting the central bank to announce it will gradually stop flooding the U.S. economy with cheap credit.
Don’t say central bankers can’t throw a good party. A recap: the Fed started buying billions in U.S. Treasuries and mortgage-backed securities in March 2020. By June of last year, Powell & Co. was spending $120 billion per month. You’ve seen the effect of that in your stock portfolio. We’ve had the strongest bull-run recovery in stocks in anyone’s memory.
Now that the party is coming to an end, how will investors react? More on that below in today’s essay.
But first, let’s check in on the headlines moving markets.
Markets update
Asia
- There are more sellers than buyers in Asia today with the Nikkei down 0.4% in afternoon trading.
- China’s zero-tolerance strategy for fighting COVID is on display again. Roughly half the flights into Beijing were canceled on Tuesday. Over the weekend, officials shut down Shanghai Disneyland—trapping 33,000 park visitors inside.
- On cue, there are more warnings about China’s post-COVID economic recovery. Companies, particularly small- and mid-sized operations—should brace for “downward pressure” across the economy, warns the country’s Premier Li Keqiang.
Europe
- The European bourses were doing very little at the start. The Stoxx Europe 600, fresh off a new all-time closing high on Tuesday, was—let’s call it “unchanged”—an hour into the trading session.
- Former central banker turned climate hawk, Mark Carney, put together a consortium of banks and asset managers called the Glasgow Financial Alliance for Net Zero. The carbon-reduction club has nearly doubled in size since its April launch, and now includes the world’s biggest financiers, with $130 trillion in assets.
- Elsewhere in COP26 land… it was billionaires day yesterday, my colleague Katherine Dunn reports from Glasgow. Jeffrey Bezos, the world’s second richest man, jetted into town on his private plane to announce a $2 billion pledge to tackle climate change. He also took the occasion to plug space travel. 🚀
U.S.
- U.S. futures are trading sideways this morning. That’s after all three major averages extended their gains, pushing the Dow[hotlink] to close above 36,000 for the first time ever.</li><li></li><li>All eyes are on the Fed today as Jerome Powell’s press conference begins at 2 p.m. ET. The smart money is on the Fed <a href="https://www.cnbc.com/2021/11/02/federal-reserve-is-about-to-set-its-post-crisis-policy-course.html">to reduce</a> its $120 billion-per-month bond-buying spree as soon as this month. That’s known as “tapering,” and judging by all the recent record-highs the markets are cool with that.</li><li>The wildest ride of the day yesterday was driven by Avis. Shares more than tripled at one point after the Nasdaq-listed car rental firm reported a big earnings beat on Monday, and CEO Joe Ferraro talked up the prospect of adding electric cars to the fleet. Even the WallStreetBets crowd <a href="https://fortune.com/2021/11/02/avis-shares-double-earnings-reddit-wallstreetbets-elon-musk-tesla-hertz/">was caught off guard</a>.</li></ul> <h4 class="wp-block-heading"> Elsewhere</h4> <ul class="wp-block-list"><li><strong>Gold</strong> is down, trading below <strong>$1,790/ounce</strong>. </li><li>The <strong>dollar</strong> is a touch lower, too.</li><li><strong>Crude</strong> is off with <strong>Brent </strong>trading below <strong>$84/barrel</strong>.</li><li>Crypto is gaining with <strong>Bitcoin</strong> back above <strong>$63,000</strong>. </li></ul> <p class="has-text-align-center">***</p> <h2 class="wp-block-heading">What to expect from the Fed</h2> <p>Ordinarily, I would have dedicated this space today to a discussion of Dow 36,000, but that was yesterday’s news. I’ll just leave you with this factoid: Last November, just before Thanksgiving, the blue-chip index topped 30,000—so it’s up 20% since then. Not to be outdone, the S&P 500 is in record territory, too. It looks like a cinch that the benchmark will eclipse the 2017 record number of all-time highs (62) set in a calendar year.</p> <p>That kind of price action doesn’t sound like we’re witnessing a taper tantrum.</p> <p>Yes, just about everyone on Wall Street is banking on Fed chair Jerome Powell to announce later today a slow-down in its asset-buying program. And, whenever there’s taper talk, there’s chatter about tightening, or rate hikes.</p> <p>Here’s where some notable Wall Street names see the Fed’s next taper and tightening moves: </p> <ul class="wp-block-list"><li>Deutsche Bank: On tapering: asset-purchases to wrap up by June. The first rate hike: December 2022.</li><li>Nordea sees a more aggressive tapering timeline, with asset-purchases ending by April. They also see three rate hikes in 2022. <em>Three</em>.</li><li>[hotlink]Goldman Sachs: a June end-date for tapering. The first rate hike: November 2022. Two hikes per year after that.
- BofA Securities: again, a June end-date for tapering. Rates: first hike in March or June is looking more likely.
- Morgan Stanley: tapering to start as soon as a week after next. Rates: Citing bond market data, the first hike will likely come within 10 months, “and as many as four more by January 2024.”
So, all signs point to an end of an era. Out is the Fed’s massively accommodating monetary policy designed to stoke economic activity. In is a more conservative approach meant to tamp down inflation. In the past, such a policy shift has been good for value stocks (think banks) and more troublesome for growth stocks (think not-very-profitable tech firms).
Another thing to watch is the bond markets. According to Morgan Stanley’s chief investment officer Lisa Shalett, “bond investors clearly believe we are close to a policy mistake.” In other words, they think the central banks have been too cautious on rates, and that the Fed, among others, will be forced to raise them more quickly.
“Watch for a jump in real and longer-duration nominal yields and a steepening of the yield curve as Treasury markets recalibrate Fed guidance,” she warns. As for stocks, she says it’s probably time to reconsider a portfolio that’s weighted to “expensive long-duration secular growth stocks that are sensitive to rising real rates.”
“Financials,” she adds, “remain our favorite global long exposure.”
***
Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com
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Quote of the day
Over the past three or four months we’ve heard lots of hand-wringing about a buyers’ strike, talk that people aren’t buying as many homes as before...That’s a fake narrative.
That would be Ed Pinto, director of the American Enterprise Institute’s Housing Center, and house-price forecaster supremo. Pinto isn't buying the hot-take that the recent slowdown in house prices is a sign of things to come. He tells Fortune's Shawn Tully the recent pullback is seasonal, and that the market will soon explode again to near double-digit growth.
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