September Economic Update
Stock prices rose precipitously in August as investors welcomed a month-long succession of upbeat economic data. The S&P 500 index finally broke through upside resistance and ended the third week of August at a record high and completing the fastest bear market recovery in history. The Nasdaq Composite, having set multiple record highs during the same week, also ended the month at a record high.
The rise in equity prices was spurred by a series of strong economic reports, including an increase in manufacturing activity, better-than-anticipated factory orders, and a lessening of new jobless claims. At the end of last month, the S&P 500 Index climbed 7.01% with the Nasdaq Composite climbing 9.59%. (1,2,3,4,5)
While economic data has bounced back from the lows back in the first quarter of the year, most indicators remain lower than their pre-COVID highs from the beginning of the year. The rise in stock prices has raised many questions as to the fundamental strength of the economy versus the activity on Wall Street. While some industries have flourished in this environment, most notably technology, other sectors have struggled such as airlines, restaurants, and traditional retail outlets.
The Federal Reserve made several policy statements from their July Meeting Minutes released on August 19. In a prepared statement, the Fed stated, “The path of the economy would depend significantly on the course of the virus.” In addition, members believe that the “...ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term...” causing members to maintain the target range for the federal funds rate at 0 to ¼ percent. (6)
On August 27, the Federal Reserve also announced their intentions to further spur inflation. The Fed has targeted an annual inflation level of 2% in the years following the 2008 recession, which it has largely been unable to achieve. Their new inflation objective will be an average of 2%, meaning that in periods of low inflation, the Fed will raise their target above the 2% threshold in order to average out the difference within that time period. While this is a large fundamental policy shift, critics point out that no specific methods were cited as to how the Fed intends to achieve this larger inflation target. (\7)
While August was a record-setting month for equities, September has begun with a moderate pullback from the recent all-time highs. Many factors can be attributed to the correction, including generally overbought conditions and the looming implied volatility of this year’s presidential election around the corner.
For a historical perspective since 1992, the S&P 500 has lost an average of 2% in the three months leading up to the presidential election but has been higher 43 percent of the time. While past performance is no guarantee of future results, the lesson may be evident: Prepare for some short-term volatility, without losing sight of your overall investment strategy. (\2)
Monthly Financial Tip:
Establish a timeline for your financial goals. List what you want to achieve and when, then periodically review your progress and the deadlines semi-annually or annually.
1. The Wall Street Journal, August 31, 2020
2. Barrons.com, August 6, 2020
3. MarketWatch, August 3, 2020
4. MarketWatch, August 27, 2020
5. The Wall Street Journal, August 18, 2020
6.- The Wall Street Journal, August 19, 2020
7.- CNN.com, August 27, 2020
8 - CNBC.com, August 10, 2020
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.