We hope you and yours are well as we approach the end of summer, a time of change even during more normal times. As we all prepare for this busy period, we wanted to share with you a look back at the markets and economy over the past month of this record-breaking year.
The S&P 500 hit a new high on Aug. 18 for the first time since February, making up for the losses in March, and continued to climb through the month. Technology and large-cap companies led the way, continuing the “tale of two markets” hidden inside the mainstream indices, a familiar story throughout the COVID-19 era.
“August has historically been relatively weak for the broad-market S&P 500, but that didn’t stop the equity index climbing over 7% for the month as the S&P 500 is on pace to post its best summer performance (+18% post-Memorial Day) since 1938,” said Raymond James Chief Investment Officer Larry Adam, “despite headwinds from COVID-19, a heated election and a Congressional stalemate over a new round of stimulus.”
The markets may have been buoyed by a stronger-than-expected earnings season, progress on COVID-19 therapeutics and vaccines, improving economic data and continued stimulus from the Federal Reserve.
There is also evidence of strength underneath the top performers, with gains being made in a fairly broad swath of the market, with second quarter corporate earnings finishing 23% above estimates, led by the performance of Consumer Discretionary stocks, Industrials, Health Care and Materials. “From the economic recovery to a possible vaccine, more records may occur by year-end. This year has proven to be tumultuous for the markets, but above all, we encourage investors to keep their long-term objectives and asset allocation in mind,” Adam said.
The strength of the market since the struggles of March doesn’t tell the full story. There are still concerns about coronavirus transmission in newly reopened schools, and market observers continue to keep an eye on unemployment figures and household earnings.
“The economic outlook continues to depend on the virus, the efforts to contain it and the degree of government support. Recent reports have painted a mixed picture of the economy,” said Raymond James Chief Economist Scott Brown.
While Congressional lawmakers are not working against a specific deadline to pass a new round of economic stimulus, “we are watching a Sept. 30 government funding deadline as the next potential target for a legislative package, which could be tied to a must-pass bill in order to avoid a government shutdown,” said Raymond James Washington Policy Analyst Ed Mills.
Monetary policy will remain accommodative. Federal Reserve Chairman Jerome Powell announced that the central bank has adopted a more tolerant approach to inflation. The Federal Reserve, recognizing that low unemployment significantly benefits low- and medium-income households, also made its employment objective “a broad-based and inclusive goal.” As a consequence, short-term interest rates are expected to remain lower for longer.
The change is subtle, however, and not a big shift from how the Federal Reserve has conducted policy in recent years.
Here are some quick takeaways:
• Optimism is strong that Operation Warp Speed, the federal and private effort to produce 300 million doses of an effective coronavirus vaccine by the end of the year, will prove successful.
• In the coming months, don’t be surprised to see an increase in volatility leading up to the U.S. election, but the overarching trends of the market environment are likely to outweigh emotional election sentiments.
• A stronger-than-expected earnings season, progress on COVID-19 therapeutics, improving economic data and continued support from the Federal Reserve have likely buoyed the markets.
With everything going on, investors are likely to see more records being set in the days to come, but in the meantime, let’s look at where we are:
Here are some brief takeaways of the conditions and events we expect will shape the market as we enter into September.
• A remarkable run has erased much of the losses shown by the mainstream indices, with the S&P 500 surpassing its previous February high in August and continuing to rise. While technology companies’ strength has been incredible – Apple is now valued at over $2 trillion, for example – the broad gains made elsewhere are worth considering.
• In the coming months, don’t be surprised to see an increase in volatility leading up to the U.S. election, said Madere. “While emotions may run high, we would use weakness as a buying opportunity. While the market recovery has been remarkable, we remain positive for the long-term, bull-market opportunity that remains.”
As we wait to see what September will bring, with optimism tempered by caution, we hope you and yours enjoy good health. Thank you again for the trust you have in us. If you have any questions or concerns, about the markets, your investments or your financial plan, please let us know.