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. Whi