Spurred on by positive economic and health developments, U.S. stock indices rose this week. The S&P 500 and NASDAQ Composite Index both achieved new record highs, and the Dow Jones Industrial Average climbed into positive territory for the year. The Federal Reserve announced a policy adjustment that softened their stance on the relationship between inflation and interest rates, a decision that likely will have investment implications for years to come.
This week, the S&P 500 Index rose 3.3% while the Dow Jones Industrial Average gained 2.6%. Since March lows, the S&P is up 60.0% while the Dow has risen 57.3%. First-time unemployment claims remained above one million this week, even as continuing claims continued to decline from spring pandemic highs. This gradual return to work is encouraging, but the dramatic number of remaining unemployed workers underscores the long road back to “normal.”
July’s reported gain in existing home sales was the strongest on record, durable goods orders (for those products intended to last more than three years) more than doubled consensus expectations, and the second quarter GDP number was revised to slightly better than originally thought. The FDA granted emergency approvals for a convalescent plasma treatment for COVID19 patients, as well as for a new low-cost Abbott Labs coronavirus test that produces results in 15 minutes without the need to send samples to an outside lab.
The Federal Reserve announced a change to their policy framework that has been in place since 2012 – a dual mandate of achieving 2% inflation and full employment (generally accepted as an unemployment rate of less than 5%). Traditionally, the Fed looked to raise short-term interest rates as a preventive measure if they felt the economy was growing too quickly and inflation was poised to rise above target. However, Chairman Jerome Powell announced this week that the Fed will not automatically take action to raise rates if inflation climbs above 2%, especially after periods where the rate persisted below 2% (such as we’ve had for the past several years). The Fed seems to be making the determination that a return to growth and lower unemployment is more important than maintaining an inflation target. While we continue to believe that higher inflation is not a threat in the near term, the Fed’s shift could have ramifications beyond 2021. Lower interest rates for longer periods is generally viewed as positive for stock prices and a headwind for bond prices.
Threats, both unpredictable and long-simmering, continue to challenge recovery prospects. Gulf Coast chemical and petroleum production dodged a major bullet as Hurricane Laura caused far less disruption to those industries than originally feared, even as the storm’s damage was significant in many other ways. While it was a positive development that U.S. and China representatives recommitted to their Phase One trade agreement this week, Chinese missile launches and U.S. warship movements in the South China Sea threaten a broader confrontation over territorial claims by the Chinese. We still believe in the recovery’s positive momentum, but continue to analyze and adapt as conditions change.
As we 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.