We hope everyone has enjoyed their summer and ready to turn over a new leaf for the fall. Markets are a buzz with the NASDAQ and S&P 500 making fresh, all-time highs at the end of August and into September before this recent market pullback. The Dow managed to reach its all-time high as well, while Small and Mid-Cap stocks still remain negative for the year. The technology sector still leads the way, even with the recent movements, and has profoundly lifted all markets higher as energy, financials and value as a whole, lag. The markets have sprung back since the March lows while the economy seems to be struggling in some areas as the re-opening process continues at varying speeds across the country. So, what’s the missing link between the capital markets and the economy, and will the economic data catch up with market performance?
The Fed and Interest Rates
Much can be said about the relationship between low interest rates and financial markets. Historically, low rates spur economic expansion and business investment which typically bodes well for corporate earnings and the markets. The Federal Reserve is the interest rate gatekeeper and follows a dual mandate of price stability and maximum employment. They enforce this mandate through monetary policy whereby reducing interest rates typically spurs growth and induces inflation, while raising rates cools expansion and keeps inflation at bay.
Chairman Jerome Powell’s recent speech on Fed policy is proving to be a momentous “game-changer.” Powell reiterated interest rates will remain low for the foreseeable future and the Fed’s mandate of 2% inflation set by former Fed Chair Ben Bernanke is now viewed as an average, not a hard target. Translation: The Fed will allow inflation to rise above 2% without raising interest rates and potentially stymieing growth. Their analysis of the recovery from the Great Recession in 2008-09 demonstrated that low interest rates and low unemployment consequently do not lead to a spike in inflation. This analysis has become the primary reason the Fed is now focused on job creation and maximum employment rather than preventing the economy from overheating. Lower for longer is the new interest rate “normal” policy which is positive for financial markets. It appears the U.S. Treasury’s print money and spend money policy will continue until inflation becomes onerous, or the economy re-gains solid footing and unemployment rates drop precipitously.
Economic Data and the Housing Market
Economic data has split with ISM Manufacturing, ISM Non-Manufacturing and Consumer Confidence, rising, while unemployment and jobless claims remain stable. As the country continues to open, we expect jobless claims to decline, but there is no precedent on how fast this will occur. The political powers are still arguing over additional stimulus funding and there is no telling if and when the next package will be approved and what type of benefits will be provided.
The housing market is heating up. Both new and existing home sales are increasing and housing starts are rising. The work from home economy is becoming a new normal as some big cities, such as New York and San Francisco, are seeing their residents head towards the suburbs. Record low mortgage rates are supporting higher prices as cheap money makes home ownership more obtainable.
We are now approximately two months from Election Day and two months is 20 years in the political world. On the positive side we might see more Government stimulus, a COVID vaccine or approved therapeutic options, increasing travel and leisure as virus rates decline, and finally, the long awaited return of the NFL!
On the downside, we are now entering Flu season, along with potential catastrophic hurricane and wildfires events. 2020 has tested us all so far and there is no telling what the remainder of the year will bring but we believe we are rapidly crossing the bridge to the other side of this terrible pandemic and historic disruption in our once normal daily lives.
The situation has been dynamic and the world has learned and grown as we all rebuild and move forward. We remain steadfast in our disciplined long-term investment approach to help our clients reach their financial goals and secure their future. We look forward to better days ahead, while remaining grateful for everything we have.
Stay safe, and enjoy the Labor Day Holiday!
As always, if you have any questions or would like to discuss your accounts or financial situation further, please call your advisor directly or email us at firstname.lastname@example.org. Please visit our website at www.benchmarkfinancial.info for more information on our planning services.