Summary:
-Economic growth may slow later in the year, with the progression of COVID-19 and the prospects for a vaccine remaining the key drivers of economic activity globally.
-We continue to expect a 2020 U.S. economic contraction in a range of –7% to –9%.
-We continue to foresee full-year growth for China in a 1% to 3% range.
-Inflation could trend gradually higher but remain below the Fed’s 2% target range.
-We expect a drop in the unemployment rate by year’s end to a range of 6% to 8%.
Investor optimism and hopes for a COVID-19 vaccine boosted the S&P 500 to its best August in decades, erasing losses incurred on the way down to the market’s pandemic low on March 23. Better-than-expected corporate earnings reports and a massive run-up in big tech stocks—including Apple, which hit a record-breaking market cap of $2 trillion last month—all gave rise to a newly minted bull market.
Unemployment claims have improved since late March, when nearly seven million people applied for jobless benefits in a single week, but August numbers remained stubbornly high, averaging above one million for every week of the month.
With the federal $600 weekly unemployment benefit enhancement expiring at the end of July and no second round of relief from Congress, out-of-work Americans found themselves on even shakier financial ground. This sense of unease was reflected in the Conference Board’s consumer confidence index, which fell sharply from its pandemic peak in June, signaling elevated concern about a protracted crisis fueled by ongoing layoffs and further small businesses failures.
Monetary policy will remain loose
Monetary stimulus was another market driver this month, with the Federal Reserve announcing a policy shift. The central bank dropped its longstanding practice of preemptively lifting interest rates to head off higher inflation in favor of “average inflation targeting.” The implication is that lower-for-longer monetary policy and low bond yields are here to stay, which will perpetuate the “TINA” theme (There Is No Alternative) that drives investors’ search for returns elsewhere, most often in the stock market.
The U.S. Federal Reserve emphasized that the course of the economy depends on the progression of COVID-19, a view that CrossPoint Wealth has held since the pandemic began. In its most recent summary of economic projections, issued in June, the Fed suggested it would leave its target range intact through 2022.
Elevated case levels of COVID-19, uneven testing capacity and the reopening of schools across much of the country all threaten to dampen investor enthusiasm. The looming election could do likewise.
Trade has reached an inflection point
The postponement on August 15 of a review of Phase One of the U.S.-China trade deal was met with a collective shrug. The cancellation attributed to scheduling difficulties, amid reports that China was struggling to meet required purchases of U.S. goods under the deal, removed for now the potential for disagreement on a topic that has roiled markets. Disagreements haven’t gone away, however; in fact, they’re piling up, with the most recent centered on Chinese-made apps and data collected from them in the United States.
Meanwhile, data from national sources confirms one of the steepest drops in global trade ever recorded occurred in the May–June period, amid COVID-19 lockdowns. China, buoyed by exports of virus-related products such as pharmaceuticals, personal protective equipment, and home-office supplies, was a notable exception.
Stock Markets, Sectors, the Dollar and Fixed Income
The S&P 500 returned 7.2% in August, its fifth straight month of gains since March. The NASDAQ Composite index closed the month at an all-time high while the S&P 500 index ended August just 0.2% below its best-ever level from the day before. Small-cap stocks rallied but failed to keep up with large-caps, while mega-cap winners monopolized market share. International stocks moved higher but couldn’t keep up with U.S. stocks: The MSCI EAFE index—a broad measure of foreign developed stocks—returned 5.1% and the MSCI Emerging Markets index rose 2.2%.
The divide between this year’s sector winners and losers continued to grow during August. U.S. consumer discretionary (which includes online retail), technology and communication stocks surged (returning between 9.1% and 12.0%), widening the gap over stocks from other sectors. Seven of the remaining eight sectors trailed the broad index for the month (industrials were the exception) and every sector outside of this trio has lagged the market year-to-date. Energy stocks are still in a deep hole in 2020, down 39.3%, and financial stocks have fallen 17.1%.
The U.S. dollar gained strength early in the month, then reversed course. This helped push gold prices to new highs in August, as did growing disinterest in low interest rates (resulting in negative real yields for short- to intermediate-term bonds), worries about increasing government debt and concerns over future inflation.
Fixed-income sectors were mixed, with a “risk-on” tone reflected in the credit markets. The broad Bloomberg Barclays U.S. Aggregate Bond index—a measure of investment-grade bonds—was down 0.8% while the U.S. high-yield index returned 1.0% for the month. Treasury prices fell as yields rose; the Bloomberg Barclays U.S. Treasury index was down 1.1% in August but remains up 8.8% for the year at month’s end.
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