No Need for Taper Trepidation for the Stock Market

All eyes will be on the Federal Reserve’s symposium in Jackson Hole, Wyoming, when Fed Chair Jerome Powell in his virtually delivered speech on Friday may—or may not—reveal the timing of the central bank’s retreat from its gargantuan bond-buying program. What will any news of tapering bond purchases mean for the stock market? The last time this happened, in 2013, the market skidded, at least temporarily.

Yes, uncertainty over monetary policy could trigger more episodes of volatility in the future, said Mark Haefele, UBS Global Wealth Management’s CIO. But he expects that any Fed move toward tapering its $120 billion monthly purchases of Treasury bonds and mortgage-backed securities (MBS) is unlikely to squelch the bull market. “We believe that the equity rally can continue and expect greater gains in cyclical and value sectors, including energy and financials,” he wrote in a research note.

For one thing, this time the tapering is well telegraphed. “The Fed is laying the groundwork for tapering only gradually to avoid a repeat of the 2013 taper tantrum,” Haefele explained.

In May 2013, the Fed’s then-chair, Ben Bernanke, surprised the market by blurting out that the body was eyeing a drawdown of its bond purchases. His remarks, in answer to a question at a congressional hearing, surprised investors. Stock and bond prices skidded.

For more stories like this, sign up for the CIO Alert newsletter. 

What’s more, Haefele added, today, key voting Fed members are more dovish than eight years ago, thus “premature withdrawal of policy support is unlikely.” Further, “labor market slack, well-anchored inflation expectations, and risks from the Delta COVID-19 variant make interest rate increases before 2023” doubtful. Whenever the taper is announced, many on Wall Street expect it to start late this year or in early 2022. The other part of a Fed tightening regimen is to raise short-term interest rates, which many believe won’t occur until 2023 at the earliest.

Opinions vary on the Fed about the exact taper timing start date. Dallas Fed President Rob Kaplan, for instance, said on CNBC that he wanted it to kick off in October. Chicago Fed President Charles Evans, though, wants to see a few more months of good jobs reports before commencing the pullback

Regardless of its pace and timetable, the mere fact that the Fed chooses to taper will be a tonic for stocks, argued Leuthold Group Chief Investment Strategiet Jim Paulsen in his newsletter. “If they decide to taper, it must be fundamentally good,” he wrote. “If the Fed actually showed some confidence that this economy was good, and it could stand on its own two feet, you might see a cyclical, small-cap rally.”

What happened last time was abrupt, but ultimately not damaging to investors. After Bernanke shot off his mouth, stocks slid 5.8% from May 22 through June 24, 2013, but those losses were made back quickly, noted BMO Capital Markets. And how. “The S&P 500 rebounded by 5% in the roughly two months following the tantrum, led higher by the materials, consumer discretionary, and health care sectors,” Goldman equity strategists wrote in a recent report. By December, the S&P 500 had clocked a dandy 32% advance for 2013.

Taper Timing: Will the Fed Move … in September? December? Next Year?

So the Federal Reserve Doesn’t Care About the Stock Market? Baloney

Tags: Ben Bernanke, COVID-19 Delta variant, Federal Reserve, Jerome Powell, Jim Paulsen, Leuthold Group, Mark Haefele, MBS, Stock Market, taper, Treasury bonds, UBS Global Wealth Management

The Yale Investments Office has long been an incubator for chief investment officers—and now it has grown its own, promoting Matthew S. T. Mendelsohn, a Yale graduate and venture capital (VC) director for the $31.2 billion endowment, to CIO roughly four months after former CIO David Swensen died following a nine-year battle with cancer.

In the past 10 years, the venture capital portfolio, which Mendelsohn directs, has returned 21.6% per year, well in excess of the S&P 500 and private equity benchmarks. It comprises more than 25% of Yale’s total endowment.

A Chartered Financial Analyst (CFA) charterholder, Mendelsohn joined the investment office upon graduating from Yale in 2007. According to the university, over the course of his tenure, he has contributed to the management of most of the asset classes in which Yale invests and has extensive experience with asset allocation, risk and liquidity management, and sourcing and developing relationships with Yale’s investment partners.

His predecessor, Swensen, who earned a Ph.D. in economics from Yale, joined the endowment in his 30s after working on Wall Street, and grew it from $1 billion to $31.2 billion over 36 years, averaging 9.9% over 20 years ending in 2020. He is credited with overhauling the endowment and changing investing methods for the entire industry by shifting away from a pure play of stocks and bonds to include alternatives. His approach became known as the “Yale Model.”

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

Under his guidance, the endowment office has incubated such CIOs as Paula Volent of Rockefeller University and Andy Golden of Princeton. Others have gone onto CIO posts upon graduating from Yale’s school of management.

Former Yale provost Ben Polak, chair of the seven-member hiring committee said, “Matt shares David’s hallmark qualities: He’s analytically rigorous both in his disciplined approach to asset allocation and in his first-principles approach to specific investments; he has incredible insight into the character and dynamics of his team and of Yale’s outside managers; and he starts from the core belief that everyone involved with the Yale endowment must operate with complete honesty, integrity, and transparency. Ethical and steadfast, tough but kind, a leader and an example to all around him, Matt deeply understands the mission of the university. He appreciates why we’re all here.”

Mendelsohn, who lives in New Haven, Connecticut, with his wife, a 2013 Yale Ph.D. graduate, and their two children, said, “I couldn’t have asked for a better set of investors to learn from and work alongside for the past 14 years,” crediting Swensen, Dean Takahashi, and all of his current and former Investments Office colleagues and investment committee members.

He added, “Looking ahead, we will build on the office’s longstanding allegiance to ethical investment practices and develop a diverse team of internal and external investment managers as we seek to continue Yale’s legacy of investment success.”