Will Powell End the Bull Market at Jackson Hole?

Federal Reserve Chairman Jerome Powell

Goodbye taper tantrum. Hello, new all-time highs.

Stocks gained with great intensity this morning as bullish enthusiasm washed over investors. Travel and energy firms posted significant returns at the open alongside vaccine manufacturers following the FDA’s full approval of the Pfizer-BioNTech vaccine. Other vaccines are expected to get the nod as well.

This morning’s “buying-bonanza” wasn’t limited to just equities, either. Crypto enjoyed a boost, too, as Bitcoin touched $50,000 for the first time since mid-May. Ethereum also rallied to $3,380.00.

And despite the recent bout of economic uncertainty and taper-related fears, Wall Street still believes that stocks have more room to rise before reaching their peak.

“Markets may take a breather after their recent run, but strong Q2 results have provided a fundamental justification and reinforced our confidence in the sustainability of the recovery,” wrote Barclays analysts.

Nomura economist Aichi Amemiya broke rank, however, when she warned investors of how Fed Chairman Jerome Powell’s upcoming speech (set for August 27th) could impact sentiment.

“Given the recent deterioration in incoming data and the pandemic situation, we see some risk Powell focuses on increased uncertainty due to the latest Covid-19 surge,” she explained.

“At a minimum, we view recent comments from Fed officials as supporting our view of a December tapering announcement despite a preference on the FOMC for November as of the July meeting.”

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The prior consensus on Wall Street was that Powell would issue an official taper warning in September immediately after the FOMC’s September meeting. Now, numerous analysts have pushed that timeline back toward the holiday season. Even Nomura economists (like Amemiya), who believed a November taper warning was more likely, expect a December warning instead.

Since the pandemic began, Covid-19 has served as a wonderful excuse for the Fed to keep its bond purchasing programs in full force. The market became concerned about tapering upon the release of the better-than-expected July jobs report, which brought US unemployment closer to the Fed’s 3.5% target.

Over the last few weeks, though, the Delta variant’s spread has assuaged most of those fears. That’s led to the expectation of a delayed taper warning on Wall Street – something that likely kick-started yet another quick rally back to new highs following the August monthly options expiration date (last Friday). Long gamma positions surged today as bears were forced to capitulate, driving the broader indexes even higher.

But that could all change as Delta infections start to tail off. The CDC recently projected that Delta already peaked in the northeastern US, where several highly-vaccinated states saw some of the highest infection rates in the country. Regardless, it’s clear that Delta’s on the way out.

Will that bring the taper timeline forward once again in the coming weeks? It certainly could. Overly good news has a tendency to shock investors into selling these days. So, don’t be surprised to see stocks sink alongside daily infection numbers.

That’s not to say the market’s going to endure a major correction any time soon, though. Every dip this year has been followed by a quick snap-back rally.

But the journey to higher market highs could very well be a bumpy ride, even if the destination – another record-setting price level for the S&P 500 in September – seems like a forgone conclusion.

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