To taper, or not to taper, that is the question. And, unfortunately, the Federal Reserve does not yet have an answer.
As you may recall, at the Federal Open Market Committee (FOMC) meeting in June, Fed members kicked the “tapering” can down the road, as they want to see “substantial further progress” in employment before adjusting their quantitative easing policy. This policy entails purchasing $80 billion in Treasury securities and $40 billion in mortgage-backed securities.
This decision to continue its easy money policy and leave key interest rates at near-zero levels came after the Consumer Price Index (CPI) rose 5% year-over-year in May and core CPI, which excludes food and energy, increased 3.8% year-over-year. The Producer Price Index (PPI) was up 0.8% in May and rose 6.6% in the past 12 months. These numbers were all well above the Fed’s initial 2% inflation mandate. It was clear then that inflation was on the rise and not as “transitory” as the Fed thought, and even more clear now following the latest inflation reports.
For July, the CPI rose 0.5% and is now up 5.4% in the past 12 months. The CPI is also running at the highest annual rate in 13 years. Core CPI increased 0.3% in July, which was below economists’ forecasts for a 0.4% increase. However, the CPI is still up 4.3% in the past 12 months. The PPI report wasn’t much better. The PPI rose 1% in July, and the core PPI, which excludes food, energy and trade margins, increased 0.9%. In the past 12 months, the PPI and core PPI have climbed 7.8% and 6.1%, respectively, so wholesale inflation is still an issue.
I should add the commodity inflation is a worldwide problem. As an example, China’s Natural Bureau of Statistics reported that producer prices rose 0.5% in July, up from 0.3% in June. In the past 12 months, producer prices surged 9% in July compared to the same month a year ago. Wholesale inflation in China is now running at its fastest annual pace since September 2008. Interestingly, China’s consumer prices rose only 1% in the past 12 months through July, largely due to a 3.7% decline in food prices. Excluding food, China’s consumer inflation rose at a 2.1% annual pace.
Fed Committee Hawks Push for Tapering
Given the rising inflation here in the U.S., the Fed is starting to experience some pushback from its more hawkish committee members, like Dallas Fed Presidential Robert Kaplan, who would like the Fed to begin tapering in the fall. Interestingly, Democratic Senator Joe Manchin would also like the Fed to begin to tap the brakes and tried to put the central bank’s feet to the fire with a letter to Fed Chairman Jerome Powell.
He wrote, “With the recession over and our strong economic recovery well underway, I am increasingly alarmed that the Fed continues to inject record amounts of stimulus into our economy.” He is also concerned that the Fed’s money printing “will lead to our economy overheating and to unavoidable inflation taxes that hard working Americans cannot afford.”
Personally, I don’t expect the Fed to even begin discussing the idea of tapering until December, let alone act on it this year. Fed Chairman Jerome Powell is up for renewal in early 2022 and the Biden administration is still proposing spending trillions of dollars in the wake of its $1 trillion bipartisan infrastructure bill. If the Fed started tapering just before the federal budget deficit soared, then it could complicate future Treasury auctions.
I’m sure the Fed will point to the weak retail sales for July. Retail sales slipped 1.1%, missing economists’ expectations for a 0.3% dip. Excluding auto sales, retail sales declined 0.4%. Economists were anticipating a 0.2% gain. The fall was likely due in large part to consumers spending less over fears of the COVID-19 Delta variant, as well as the global semiconductor chip shortages and supply chain glitches. I should note that Mastercard, which tracks consumer spending, found that retail sales rose 11% from a year ago. Apparel and jewelry sales surged 80% and restaurant sales climbed 61% year-over-year. Clearly, consumers are spending, so I wouldn’t let this retail sales report distract you.
All in all, I do expect the Fed to remain accommodative, and that’s great news for the stock market. Keep in mind that the 10-year Treasury yield has remained below 2% for two-straight years now (it’s currently around 1.24% today), so fixed-income investors are pouring into the stock market in search of higher yields.
The reality is bond yields and the rates that banks pay are not very attractive right now, especially when the Dow has about a 2.3% dividend yield and many dividend stocks have even higher yields. Case in point: The Elite Dividend Payers section (a total of eight stocks) of my Platinum Growth Club Model Portfolio has an average 3.8% dividend yield. Two yield more than 7%. Out of the 36 Elite Dividend Payers in Growth Investor (all of which Platinum Growth Club subscribers have full access to), 27 of these companies have dividend yields between 2% and 7.8%. Plus, they’re highly rated in Dividend Grader.
Looking forward, I expect dividend growth stocks and high-quality stocks to be go-to investments. And I’m pleased to say that my Platinum Growth Club Model Portfolio is chock-full of both, making it perfectly positioned to benefit from the flight to quality. I handpick all of my Model Portfolio recommendations from my different stock services – Growth Investor, Breakthrough Stocks and Accelerated Profits – what I consider the crème de la crème out of all my Buy List stocks.
As a Platinum Growth Club subscriber, in addition to access to this exclusive Model Portfolio and 100+ stocks across all of my services, you also have complete access to every single Weekly Update, Monthly Issue, Market and Trade Alerts, as well as exclusive podcasts and Live Chat events.
Speaking of exclusive podcasts, I will be releasing my Platinum Growth Club Special Market Podcast for August later this week. I will be sharing my latest thoughts on the stock market, if I expect the Middle East tensions and Taliban takeover to impact the stock market, the Federal Reserve, as well as share updates on several Platinum Growth Club Model Portfolio stocks.
The Editor (Louis Navellier) hereby discloses that as of the date of this email, the Editor (Louis Navellier), directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below: