Passenger Rail Proposal

The author says that, if passed, a $953 billion compromise proposal on infrastructure forged by President Joe Biden and senators would be the first infrastructure deal the country has enacted in years. 

New highs in stocks this week have investors jubilant and a little relieved after last week’s declines. Credit some jawboning from the Fed, and hopes that an infrastructure compromise announced by the president this week might make its way through the Senate.

What a difference one week makes! Last Friday, markets took a nosedive on the back of what is called “triple witching,” which happens once each quarter. On the third Friday of the last quarter of the month, stock options, stock index futures and stock index options contracts all expire on the same day.

It is usually an event accompanied by extraordinary volatility. It didn’t help that it coincided with hawkish comments from one nonvoting member of the Federal Reserve Bank.

However, as I suspected, over the weekend, investors decided the sell-off in equities was overdone and unwarranted. Monday saw the S&P 500 Index recoup all its losses, and then some. The Nasdaq index led the way, thanks to the leadership of technology. The rotation game is certainly alive and well with growth nudging aside value again, while the red-hot commodity and industrial trades were going through a period of consolidation.

An infrastructure deal has also moved a little closer to reality.

“We have a deal,” said President Joe Biden on Thursday, after meeting with a bipartisan group of senators on a $953 billion compromise proposal. If passed (and that is no guarantee), it would be the first infrastructure deal the country has passed in years. It is good news, but it still puts the U.S. way behind the eight ball, compared with China and even Europe’s infrastructure spending.

Industrial stocks gained ground after the announcement, along with some basic material stocks. I would expect that after this week’s gains, the markets should see some profit-taking into next week. But, these are all short-term moves.

One reader asked what do I expect will happen during the remainder of this year? That is a difficult question.

Further progress in the equity market depends on several unknown variables. A passage of an infrastructure bill, bipartisan, or not, would boost growth prospects and enable the stock market to go higher. We won’t know the outcome until at least next month, if not longer.

There is an added risk that the bond market might not like: an additional trillion dollars or so in new spending, even if it is spread out over the next 10 years. If higher interest rates are the result, it would add further fuel to the rotational spin. It would temper the gains in some sectors  while adding to improved prices in others.

The Fed has also put us on notice that monetary policy will be changing. As a first step, we can expect the Fed’s asset purchases to slow down and even decline. This could be followed by interest rate hikes in 2022.

Investors will be fretting over when and how much tightening might occur over the next two years. We will probably know more about those details sometime in August. That could add to the market’s volatility during August and September.

Why, you might ask, would today’s investors be so concerned about what happens next year, or even the year after? Remember that the stock market usually discounts the future. Many professionals adjust their portfolios in anticipation of something that may happen six to nine months out. And that brings us to my third variable, which could be a “Black Swan kind of event — the delta variant.

On Thursday, I wrote a column on the dangers presented by the delta variant of the coronavirus. This is the mutation that has devastated India and is rapidly becoming the dominant strain around the world. It is twice as virulent and deadly as the old strains, especially to those under 50 years old. The unvaccinated are most susceptible to the delta variant.

I am worried that we suddenly see a spike in new delta cases that impacts economic growth. Remember that less than half of all Americans are fully vaccinated. The president, his chief medical adviser, Anthony Fauci, and the Fed are all sounding warnings over this risk, yet the markets are ignoring it.

So, where does all this leave us? I expect the S&P 500 Index could climb another 400 points or so by the end of the year, if all goes well. I base those additional gains on the continued ropening of the economy. It won’t be a straight line up however, especially if we see a surge in new variant coronavirus cases.

We might also expect a 10 percent-plus correction sometime in the fall. That would be normal, and history indicates that we should expect at least one such decline per year.

The pullback would likely be caused by a rise in interest rates. What could cause higher rates? An unanticipated tightening of monetary policy by the Fed, due to higher inflation. We could see the U.S. 10-year Treasury bond, for example, kiss 2 percent (from 1.5 percent today) by the end of the year. The truth is that most market sell-offs happen when least expected, and with little to no warning. It is simply the cost of doing business in the stock market.

Bill Schmick is registered as an investment adviser representative of Onota Partners Inc. in the Berkshires. He can be reached at 413-347-2401, or email him at billiams1948@gmail.com.