Market Update - Four Pillars of the Rally Updated

The broad stock market performance last week was worse than the S&P 500’s modest decline would imply. The reason for the weakness was clear: More erosion of our “Four Pillars” of the rally. But while further erosion is occurring, and this market is vulnerable to a pullback (especially if we get a new incremental negative headline), the four pillars still remain intact, and as such the medium- and longer-term outlook for stocks and risk assets (commodities/real estate) remains favorable.

 Historic Fed accommodation (Pillar One) is still very much in place, but taper of QE is coming and will likely be announced in late August and begin in December. That’s an erosion compared to March (where tapering wasn’t a consideration) but at the same time the pace of reduction of QE will be very slow, and still supportive of (1) The economy and (2) Asset prices. As we’ve said before, too many or too quick rate hikes kill rallies, and reducing QE is not a rate hike.

 Historic fiscal stimulus (Pillar Two) is still intact (stimulus money is still being spent) but the outlook for infrastructure is muddying the waters a bit. The bipartisan infrastructure bill (essentially $1 trillion in stimulus with no tax hikes) is what the market would prefer, but it looks like it’s close to dying in Congress (and it may die this week). In its place will be a loud debate about the $3 trillion “Human Infrastructure” bill, and that means a lot more headlines about corporate tax hikes and capital gains tax hikes. If that passes, it will put this pillar in jeopardy, but for now passage of that bill remains remote. Point being, despite the headlines, the reality is that fiscal stimulus and policy is still supporting stocks.