Autumn 2020 is upon us as we enter the 4th quarter of an unforgettable year. The President has Covid, we are less than 30 days from a historic (possibly contested) election, no agreement yet on additional stimulus, raging wildfires out west, and an all-important earnings season is just days away. We always say that markets don’t like uncertainty and it’s hard to remember a time in recent history with more uncertainty than now. So how are the markets somewhat stable, and what’s propelling them upward? This is a fascinating moment in history of which we haven’t witnessed before, but there are some reasonable explanations for why markets are performing well in the face of tremendous uncertainty.
The third quarter was a bit of a rollercoaster ride with record performance in August followed by a September correction. September is historically a volatile month and 2020 was no different. The Nasdaq corrected over 10% in a matter of days only to rally towards the end of the month. The Dow and S&P 500 also dipped and rallied but not to the same extent of the tech-heavy Nasdaq. All of the major indices ended the quarter positive for the year, which is a feat on its own all things considered.
Economic Data and the Housing Market
Economic data is strengthening for the most part. The unemployment rate is dropping slightly with both new jobless claims and continuing claims decreasing. Consumer confidence is also rising somewhat as are both ISM manufacturing and non-manufacturing. Housing is on fire as both new and existing home sales rise and prices surge. Low mortgage rates are only adding fuel to the fire as cheap money makes it easier to afford more for those in search of a new home.
The Money Supply
There has been much discussion recently about stimulus and the Fed pumping money into the economy. In fact, M2 money supply (calculation including cash, checking deposits, savings deposits, money market securities, mutual funds, and other time deposits) has grown by at least 20% from $15.33 trillion at the end of 2019 to $18.3 trillion at the end of July 2020 according to CNBC.com. This is an extraordinary increase considering M2 growth has never exceeded 15% prior to 2020. More money in the system and cheap money (interest rates at or close to 0%) are intended to resuscitate an economy suffering from high unemployment and massive uncertainty.
Don’t Fight the Fed
The old adage that says don’t fight the Fed reigns true. As long as the Fed remains accommodative and interest rates remain low, markets seem to ignore most of the other uncertainty. The Fed has become the ultimate backstop for financial markets and Fed Chairman Powell has remained steadfast that interest rates will not rise until at least 2023 unless inflation starts to run rampant. Although low interest rates hamper yields and savings rates, they still provide the basis for economic growth which our current economy is banking on.
We anticipate 3rd quarter corporate earnings to be solid as the country continues to reopen. Additional stimulus is needed to prevent further layoffs across many sectors and we believe both Republicans and Democrats will come to some agreement to provide this bridge to help Americans still suffering from the economic effects of the virus. There are positives and negatives to the upcoming election and it’s still too soon to predict who will come out on top. However, we believe the country will prosper in the future and we will place the virus in the rear view mirror sometime in 2021. It’s been a rough road for the first 3 quarters of this historic year, but we believe a vaccine will be introduced, as well as, new therapeutics in 2021 that will help get us to the other side. We certainly have some healing to do, but better days will come.
Stay tuned and stay safe!
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