Aug 23, 2021

Axios Markets

Today's newsletter is 1,280 words, 5 minutes.

🤷‍♂️ of the day: 24%, the spread between the highest and lowest 2021 S&P 500 target among strategists followed by Bloomberg.

1 big thing: What to make of trader sentiment

Illustration: Annelise Capossela/Axios

Traders have their eyes on COVID-19 and inflation.

Why it matters: Sentiment can drive the direction of markets in the short term as traders react to daily news headlines.

By the numbers: According to the new Charles Schwab Active Trader Pulse survey, the COVID-19 pandemic is the leading risk among traders, with respondents identifying it as having the biggest impact on their investment strategy for the remainder of the year.

  • This risk ranked just ahead of inflation and Federal Reserve policy.

According to Bank of America’s August Global Fund Manager survey published last Tuesday, inflation and a Fed-triggered "taper tantrum" are leading risks, but the spread of the Delta variant is rising rapidly on the list.

What they’re saying: "Sentiment is among the most influential factors over the short- to medium-term (weeks to months) as emotion swings with headlines, economic reports, and the latest corporate news," Jason Goepfert, chief research officer at SentimenTrader, tells Axios.

  • In other words, even as the long-term fundamentals of a stock or the stock market may be intact, news headlines that amplify traders’ concerns can cause prices to drop.

Yes, but: Dave Lutz, managing director at JonesTrading, tells Axios that while he agrees sentiment is a key driver of market volatility, that volatility may be limited when the particular concern is already well-known.

  • "The biggest factor – in my opinion – is the 'unknowns,'" he says. "If a bad event is seen coming down the pike (like the taper), the market can digest it no problem. It’s when there are 'unknown' outcomes or events that really cause the ripple."

Between the lines: Michael Antonelli, market strategist at Baird, cautions that measuring sentiment accurately isn't as simple tallying the results of a survey.

  • "The issue is that there’s no real way to measure sentiment because it’s always changing as price changes," he tells Axios. "Trying to use it as a market-timing tool is incredibly difficult because it usually only works at extremes."

The big picture: It’s interesting knowing what market participants are worried about. But that information doesn’t necessarily make the market any more predictable in a way that most traders and investors can exploit.

  • "I always feel ‘slow and steady wins the race,'" Lutz says. "Yeah, some cats are exceptional market timers and can play quick trends, but the average investor shouldn’t shift every time the short-term winds move in a different direction."
2. Catch up quick

Treasury Secretary Janet Yellen supports reappointing Jerome Powell as Federal Reserve chair. (Bloomberg)

GM has recalled its Chevrolet Bolt electric vehicles due to the risk of fires. (Reuters)

Bitcoin has topped $50,000 for the first time in three months. (CNBC)

3. Chip shortage begets chip shortage

Illustration: Shoshana Gordon/Axios

We have a shortage of semiconductors in part because of...a shortage of semiconductors, Axios' Kate Marino writes.

Driving the news: The chip shortage has entered a new phase. The main problem during the first half of the year was a dearth of wafers — but now that we have more wafers, the problem is assembling those wafers into integrated circuits for circuit boards, according to a report by IHS Markit.

  • There's a shortage of assembly equipment because the equipment, too, needs chips that are in short supply, according to the report.

Why it matters: The chip shortage's impact on vehicle manufacturing, and the global economy, is far-reaching. Auto plants have shut down, and newly made vehicles sans chips sit like zombies in parking lots. Prices for used cars — and car rentals — have skyrocketed.

  • Worldwide, the shortage will cut car and truck manufacturing by as much as 7.1 million vehicles this year, IHS Markit estimates.
  • The recovery from the shortage is now unlikely to start before the second half of 2022.

State of play: Other things needed for the assembly of the completed circuit board are in short supply. Materials like lead frames, substrates and resins are also constrained, IHS Markit says.

  • It's labor, too: Assembly and test locations are concentrated in Asian and Southeast Asian regions where Covid vaccination rates are low — and outbreaks have led to plant shutdowns. Malaysia, for instance, a hub for chip testing and packaging, has been on some form of lockdown since May.

"Wafer fabrication capacity got all the attention early this year, and rightly so," writes Phil Amsrud, IHS Markit senior analyst, in the report. But problems getting the wafers packaged and onto completed circuit boards means "you still can’t produce and sell a car."

Between the lines: The wafer problem impacted mainly automotive microcontrollers. But the assembly issue impacts a broader swath of semiconductors, including those used in items like laptops, smartphones and TVs, says Amsrud.

  • Unlike in wafer fabrication, profit margins in assembly and testing are exceedingly low — so there's little incentive for companies to speculatively invest in adding more capacity, IHS Markit said.

The bottom line: Wafer manufacturing is improving — but don't expect a normal car market any time soon.

4. The business community has had enough QE
Expand chart
Data: NABE; Chart: Sara Wise/Axios

The business community’s love affair with the Fed’s unusually accommodative monetary policy may be over.

Why it matters: The Fed has signaled that it expects to soon announce plans to taper quantitative easing (QE), an emergency monetary policy program designed to keep interest rates low and bond markets very liquid.

  • This tapering could introduce problems into the economy if the beneficiaries of the stimulus aren’t ready to see it go.
  • However, if they are prepared, market volatility in light of any announcement could be limited.

By the numbers: The National Association of Business Economics (NABE) recently surveyed its members, which include corporate economists, financial planners, cost analysts and business leaders.

  • As of August, 52% of respondents said monetary policy is “too stimulative,” double the 26% that said so when the survey was last conducted in March.
  • Meanwhile, 47% say it’s “about right,” down from 72% in March.
  • No one (0%) thinks it’s too restrictive, down from 2% in March.

State of play: According to recent Fed minutes, “most” officials agreed this tapering should start by the end of the year if the economic growth stays on track.

What they’re saying: While the NABE didn’t explicitly ask its members if the Fed “should” begin tapering this year, 52% did say that the Fed “will.”

  • "I would guess that at least as high a share would support tapering to begin 2021," Ken Simonson, chief economist at the Associated General Contractors of America, tells Axios.

What to watch: Fed chair Jerome Powell joins the Jackson Hole Economic Policy Symposium remotely on Friday, where he’s expected to present his updated assessment of the economy.

5. What I'm watching this week

Illustration: Eniola Odetunde/Axios

We already know market-watchers will be laser-focused on Jackson Hole. But how many unbuilt or unfinished homes were sold?

What to watch: Tuesday comes with the July new home sales report.

Why it matters: Low mortgage rates and the demand for more space have motivated many to move out of their urban apartment rentals and buy a home in the suburbs.

Yes, but: Demand has been outstripping supply, leading to shortages and soaring prices.

  • A slowing pace of sales may just reflect a lack of homes available for sale, not weaker demand.

Between the lines: The June new home sales report revealed that an unusually high 76.6% of new homes sold were either still under construction or not yet started.

  • In other words, demand is so high people are willing to close on homes they can’t yet move into.

What they’re saying: "We look for new home sales to end three straight months of declines," Wells Fargo economists wrote on Friday.

  • "While sales should improve in July, we may continue to see some stops and starts in the new home market, as builders try to work through a backlog of projects in the face of persistent material shortages."