Market Update – August 22, 2020

Major U.S. stock indices were mixed this week, even as the S&P 500 and NASDAQ Composite indices both reached new record highs on Friday. The number of people filing for unemployment benefits last week was greater than expected, a sign that the labor market’s recovery is decelerating due to ongoing complications related to the coronavirus pandemic. However, positive news from the housing sector continues to engender hope for economic recovery. As the U.S. election season begins to heat up, people on both sides of the political aisle have concerns about financial markets’ potential reaction to the November results. While we don’t have a crystal ball, there are reasons why we remain optimistic for the longer-term outlook for stocks, regardless of who’s elected.

This week, the S&P 500 Index gained 0.72% while the Dow Jones Industrial Average was flat. Year to date, the S&P is up 5.15% while the Dow is down – 2.13%. The Labor Department announced on Thursday that the weekly initial claims for jobless benefits increased after a series of declines to a seasonally adjusted 1.1 million in the week ended Aug. 15. Ongoing claims fell to 14.8 million in the week ended Aug. 8, the lowest reading since early April.

The resiliency of the housing market continues to be a bright spot during the pandemic. Sales of both new and existing homes continue to increase, and building permits for new home construction projects continues to grow both month-over-month and year-over-year. A trend of city-dwellers moving in larger numbers to suburbs has begun to form; this development bears watching to see if the moves persist after the pandemic is brought under control. Home improvement project activity has also ramped up as more Americans have been staying home for extended periods, looking to execute on planned maintenance and upgrades. This activity has led to impressive results for many home improvement and building supply companies.

With both the S&P 500 Index and the Dow Jones Industrial Average up more than 50% since the lows of March, it’s reasonable to wonder where stock prices will go from here. As always, we never can predict the future. However, there are five reasons why we feel that stocks could still be positioned well for the next several years:

  • There is more than $4 trillion currently in money markets and cash on the sidelines. Some of this money is proceeds from sales made during the depths of the pandemic and will eventually look to be reinvested.
  • Future possible stock returns are relatively appealing, compared to bonds and other asset classes. With interest rates very low, total returns for bond funds over the next few years could be modest. (Of course, bonds still play an important part in diversified portfolios to reduce overall risk.)
  • There has been, and continues to be, immense levels of monetary and fiscal stimulus provided by governments and central banks across the globe.
  • With all the resources committed to developing a coronavirus vaccine, odds of an effective solution happening within the next year are decent. This would almost certainly lead to improved investor sentiment and increased appetite for riskier assets.
  • While demand for some products and services has recovered significantly from pandemic lows, there still is room for aggregate economic demand to return to pre-virus levels. This would be positive for corporate earnings, and in turn stock prices.

As we continue to navigate through the pandemic, our commitment remains to be here for you each step of the way. As always, please contact us with any questions about the economy and your financial plan.

Nathan Mersereau will continue posting short videos to provide timely insights and advice. We will post links to Nathan’s video updates across all of our social media channels.

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