The major stock market averages posted solid gains last week. The Dow Jones Industrial Average rose 2.6% to 28,653 – erasing its losses for the year. The NASDAQ Composite added 3.3% to 11,695 and the Standard & Poor’s 500 Index rose 3.3% to a record high close of 3,508 – giving it a 5-week winning streak and putting it on pace for the biggest August gain since 1984 according to data from CNBC.
We are often asked why the broad market indices are holding up so well given the weakness in the real economy due to the pandemic. For starters, the market looks forward and moves on what it thinks the future will be like, as opposed to the past, or even present conditions. The stock market is expecting there will be a vaccine in the fall and that the situation regarding COVID-19 will improve. Additionally, the market is clearly benefitting from both fiscal policy and monetary policy stimulus. Government spending and low interest rates have supported stock prices. Furthering that theme and supporting last week’s gains were comments from the Federal Reserve.
In revising its monetary policy, Fed chair Powell cited appreciation for the benefits of “a strong labor market”, and stated “a robust job market can be sustained without causing an unwelcome increase in inflation”. This was major news for economists, both professional and armchair alike, as they can revisit the Phillips curve (which states that inflation and unemployment have an inverse relationship) with new zest! It is important outside of those circles as well however, as it simply means the Fed would tolerate more inflation down the road and be in no hurry to raise interest rates. Put another way, the Fed will be leaving the punch bowl at the party for longer than previously expected!
Looking to the week ahead, along with still contemplating the Fed’s updated policy framework, we’ll be getting a fresh batch of economic data, including numbers on Construction Spending, Durable Goods, and Factory Orders. The most anticipated number will come Friday with the release of the August Jobs Report, where expectations are for nonfarm payrolls to increase by 1.4 to 1.5 million and for the unemployment rate to be a few ticks improved from the prior month, possibly coming in below 10%.
As always, please contact us with any questions or if you would like to set up a meeting.
All the best – Southport Station Financial Management, LLC