October Economic Update
After two months of gains, stocks pulled back over the course of last month. In addition to generally over-bought market conditions, investors paused over concerns of stalled fiscal stimulus negotiations in Washington, volatility for the upcoming election, and new coronavirus cases emerging in Europe. The S&P 500 Index slipped 3.92%, the Nasdaq declined 5.16%, and the Dow Jones ended the month down 2.28%. (1)
Notably, the Nasdaq which rallied strong in August, led the major market indices in declines as investor sentiment turned negative. This can largely be attributed to apprehensions regarding high stock valuations relative to future earnings, over-bought conditions, and growing concerns that growth technology companies may have to service their long-term debt in an environment which has struggled to promote inflation. These longer-term debt obligations would typically be discounted into stock valuations by analysts who adjust for the value of money for future debt payments. In a low inflationary or deflationary environment, companies must pay higher costs than initially anticipated for these future loan payments.
The Federal Reserve & Economic Releases
Each announcement by the Federal Reserve is closely watched and dissected by investors and fund managers alike. In September, the Fed signaled that interest rates would likely not increase until 2023, with inflation struggling to reach their threshold of an average of 2%. Fed officials also stressed the importance of additional fiscal stimulus to spur inflation, reduce the number of foreclosures and evictions, and to generally encourage consumer spending.
One positive note announced by the Federal Reserve was their adjusted outlook for unemployment, predicting that it would average between 7 and 8 percent in the final three months of the year. Previously, officials had forecasted higher unemployment levels between 9 and 10 percent in the final months of the year. (2)
There were other bright spots last month amid the stock pullback, including a 1.8 percent increase for durable goods orders and industrial production output rising 0.4 percent. While these levels remain well below pre-COVID numbers, they are signs that economic production is steadily improving in these areas. (3,4)
In recent days we have witnessed a presidential debate like no other, a sitting President contracting COVID-19, and continued anticipation for an economic stimulus package to be approved by congress. While still shy of all-time highs, stocks have rebounded from their recent pullback amid the turmoil. Nonetheless, we can surely expect more stock “dips and rips” in the months to come as the election approaches. As always, we remain vigilant in monitoring these changing conditions to manage our portfolios.
We wish you and your family continued health and hope that you are will get outside to enjoy the beauty of fall and the last days of t-shirts and shorts (at least for those of you in the Midwest).
Monthly Financial Tip:
Always explore the alternatives before you make a big-ticket purchase. A few minutes of online searching may bring you exactly what you want (or close) at considerable savings.
1. The Wall Street Journal, September 30, 2020
2. The Wall Street Journal, September 16, 2020
3. The Wall Street Journal, September 15, 2020
4. The Wall Street Journal, September 25, 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.