No Taper Tantrums, This Bull Market is All Grown Up

Oct 19, 2021

By Ben Norris, Securities Research Analyst, Associate Vice President

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Third-quarter earnings season kicked off last week accompanied by a slew of economic and market data releases. Third-quarter earnings is off to a strong start relative to consensus expectations and stocks gained accordingly last week with Thursday showing the strongest daily performance (+1.7%) for the S&P 500 (SPX) since March. Last week, the S&P 500 gained 1.8% while the NASDAQ Composite (COMP) and Dow Jones Industrial Average (DJIA) gained 2.2% and 1.6%, respectively. So far, earnings results are coming in +16% ahead of expectations, versus a +4% surprise on average. S&P 500 companies are expected to post profit growth of 32% versus last year’s third-quarter results. The coming few weeks will help investors form opinions on where we are in the ongoing recovery. Specifically, management teams will likely face questions concerning supply chain issues, labor constraints, and pricing pressure in general.

Financial stocks kicked off this earnings season, but surprisingly, the sector was just a middling performer for the week despite very strong results. The Materials sector on the other hand, was the best performing sector for the week, on the back of surging commodity prices. A basket of base metals gained 10.54% last week, while a broad basket of commodities gained 3.1%, all while WTI Crude Oil continues its nine -week rally, reaching its highest price per barrel (~$81) since 2014. Supply chains around the world remain a tangled mess, which has led to headaches for corporations (especially those with significant global operations) but has also created unique opportunities for opportunistic money managers. The problem/opportunity looks like it will persist through the holiday shopping season as companies are taking drastic measures to ensure they have the necessary inventory to meet customer demand.

Other strong performing sectors last week included Real Estate, Consumer Discretionary, and Technology stocks as the recent move higher in long rates took a brief pause and investors shifted to a more risk-on posture. Retail sales rose 0.7% in September coming in well ahead of the expected 0.2% decline. Sales in general merchandise stores, gas stations, and automobiles led the gain while 11 of 13 categories showed growth. Retail sales are up ~14% year-over-year figure that certainly helped the performance of Consumer Discretionary stocks last week. On the other hand, the traditionally defensive sectors (Consumer Staples, Healthcare, and Communication Services) were relative underperformers last week with Communication Services being the only sector that posted a negative return.

In economic news last week, the Federal Open Market Committee (FOMC) released much-anticipated minutes from its mid-September meeting. Investors have been eager to get some clarity on when the Fed will begin to taper its bond purchasing campaign. The Fed’s $120 billion in monthly purchases have been a key feature supporting this bull market. Minutes indicated that tapering could begin as early as mid-November and will almost certainly commence before 2022. The market took this news in stride as the Fed has done its best to telegraph its tapering plans to avoid surprising markets. In 2013, the last time the Fed moved to taper asset purchases, the market kind of acted like a toddler being told “No” – it threw a tantrum. Bond yields surged and global markets briefly sunk before quickly recovering following some soothing words from then Fed Chairman Ben Bernanke. The difference between 2013 and 2021 is that this time the Fed has made sure investors know what to expect – which should mean no tantrums this time around.

A lingering question does remain though. Can markets continue to march higher without (arguably excessive) support from the Fed? Since the 2013 taper tantrum the S&P 500 has gained >170% and has only had a single drawdown greater than 20% – the Covid-induced pullback in March 2020 that lasted less than a quarter. Absent the pandemic-induced pullback, markets have been in an insane bull market since the Great Financial Crisis. While the S&P 500 has gained 170% over the last 81/2years, the Federal Reserve’s balance sheet has increased ~150%. Much of that increase has come since the beginning of the pandemic as the Fed rushed in to support an economy in danger of grinding to a halt. Still, many investors are left wondering if stocks can continue their torrid pace higher without the money printer going brrrrrrr.

Much of the attention this week will be about third-quarter earnings reports, but there are some notable economic announcements on tap this week. The headliner in economic news will be the Federal Reserve’s Beige Book report. Thursday will bring the typical jobless claims numbers, which have been a focal point for investors after the Fed has indicated that employment is an important part of its tapering discussions.

Date Report Previous Consensus
Monday 10/18/2021 Industrial Production



Capacity Utilization



Tuesday 10/19/2021 Building Permits (SAAR)



Housing Starts (SAAR)



Wednesday 10/20/2021 Fed Beige Book
Thursday 10/21/2021 Initial Jobless Claims



Continuing Jobless Claims


Leading Economic Indicators



Friday 10/22/2021 Manufacturing PMI



Services PMI




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