United States

This hasn’t happened since the Taper Tantrum


Source: FactSet, as of 8/9/2021

Major stock indexes have faced little resistance in their march to multiple new highs this year. However, investor sentiment is waning according to one widely followed measure. The Sentix Economic Indexes gauge investors’ perception of current and future market conditions. The most recent U.S. composite reading (blue line), which combines both measures, fell from an all-time high. As shown in the chart, the expectations component (green line) has declined in each of the last four months, while views on current market conditions (gray line) recently fell after steadily increasing since May of last year. This suggests to us that uncertainties surrounding the Delta variant, ongoing supply-chain issues, and the threat of sustained higher inflation — to name a few — may be starting to take their toll on investors’ psyches. That said, we also see a lot of encouraging data, including: last Friday’s nonfarm payrolls report, which showed the largest since increase in hiring since last August (+943,000); and robust S&P 500 aggregate earnings, which are poised for record-setting year-over-year growth.

While overall investor sentiment remains at multi-year highs, it’s noteworthy that the composite reading plateaued at the same time the Current Situation rose above the Expectations measure before subsequently declining. This scenario last occurred just prior to the 2013 Taper Tantrum1. Looking at today’s investment landscape, the most recent nonfarm payrolls report may lend support to recent arguments from some Federal Reserve (Fed) presidents who suggested the central bank should consider aggressive tapering of its current bond-buying program if labor market strength persists. Although we do not expect an imminent policy change based on this month’s report — Fed Chair Powell recently said that while demand for labor is very strong, the labor market "has a ways to go" — we wouldn’t be surprised to see an uptick in volatility over the coming months, particularly if job growth continues to be robust. For investors with a long-term perspective who are committed to their portfolio strategy, we view any bouts of market turbulence as an opportunity to rebalance their portfolio to target weights.

1 Period of heightened market volatility following then-Fed Chairman Ben Bernanke’s announcement that the central bank was going to reduce (taper) its monetary support following the Global Financial Crisis by reducing its bond purchases.

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