Too Soon For Champagne? | August 28, 2020

AUTHOR: Jason J. Roque, CFP®, APMA®, AWMA®
TITLE:    Investment Adviser Rep – CCO
TAGS:   Nasdaq, Jobs, Mortgage, Correction

Markets are sipping champagne for their victory over the recent recession. Did they pop the cork a bit too soon?


The week began with markets on the rise. It is becoming more likely the vaccine being tested by AstraZeneca may be fast-tracked. Additionally, COVID cases fell in the US to levels last seen in June. This buoyed optimism that the worst may be in the rear-view mirror at this point.


Markets spent most of the day at break even. As the day wore on, market sentiment improved and the S&P 500 and NASDAQ both closed at new highs. The Dow Jones slipped as Exxon Mobil, Raytheon, and Pfizer prepare to exit the index. This is a move that is intended to better diversify the Dow Jones as a representation of the overall US economy. The three companies are being replaced by Salesforce.com, Amgen, and Honeywell.


Markets surged on Wednesday, closing more than 1% above the previous day. Major economic news included strong durable goods, a fall in oil inventories, and mortgage market data that showed continued strength. Driving markets Wednesday was the anticipation of Federal Reserve Board (FRB) comments coming on Thursday. There was a lot of expectation that the FRB was going to adjust how they target inflation. The anticipation of a more investor-friendly structure pushed markets upward.


The FRB did not disappoint. Their comments indicated they would let the economy run hot for an extended period before tightening interest rates. This would encourage a more consistent 2% inflation rate. This let investors know that policy will be loose for a prolonged period of time. Markets were up but faded into the close as it became clear the economy needs additional stimulus.


Economic data on Friday aided a market that really didn’t need much help. Core PCE (The FRB’s preferred measure of inflation) rose from 1.1% to 1.3% YoY in July. Additionally, Michigan Consumer Confidence rose to 74.1 from 72.5 in August. This is still low, but ever improving.


Markets soared as the S&P 500 rose 3.26% on the week. After cracking its February high, markets seemed unstoppable. That is the problem. We have seen strong price growth over the last 5 months, while revenues have returned more modestly. This makes the markets ripe for a correction. The potential exists, with how fragile the economy is, for a double dip recession. Septembers have historically been a more turbulent month, so buckle in and finish that glass of champagne… quickly.

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