The markets shrugged off the chaotic situation in Afghanistan as many Americans were left with heavy hearts after yesterday’s events. Years ago this type of event would have had a big impact on the markets, but as the world has changed so have the manner in which these awful developments are digested by the markets.
However, all eyes were on the Jackson Hole virtual summit this morning and the Fed did not disappoint. A dovish Fed speech by chairman Jerome Powell eased bond pressures and helped lift stocks on Friday. While the Fed will most likely begin to taper its bond and mortgage-backed security purchases later in the year, but Chairman Powell’s comments remain extremely dovish. With full employment still far off, an increase in Covid cases, and a slow down in consumer spending, Powell did his best to not spook the markets. However, inflation is everywhere. The Fed’s favorite inflation indicator, the PCE, came in a touch lower, but still at 30-year highs. As we have discussed previously, certain costs such as lumber (which has retreated significantly from peaks), used cars, and micro-processors will prove to be transitory, but other costs such as wages and housing costs will prove to be stickier. The Fed’s goal of encouraging inflation with a focus on wage inflation only makes sense if core goods and services don’t inflate more than inflation. This is what the Fed is betting on and only time will tell if it will be a good or bad policy decision.
For the moment, the bond market is on the side of the Fed. This is encouraging the flight of capital to fixed assets such as equities and real estate. One famed bond manager stated that equities are expensive but a better investment than bonds. Low bond yields have helped consumers and corporations alike lower their debt burden, raise cash cheaply, or buy assets with attractive debt. All this has helped our economy recover very quickly from a once-in-a-lifetime pandemic. The markets are richly valued and while caution is warranted, animal spirits are alive and well.
Non-traditional mortgage products are dominating the news as the pool of traditional borrowers have had a long period of time to refinance into very low-interest rates, and buyers are stretching as home prices have soared. At Insignia Mortgage, we are seeing great demand for these products at the moment, especially amongst the self-employed whose income can be choppy and the bulk of their owned assets may be held inside corporations or other entities.