When navigating the financial markets, the long-term investor must keep in mind the four basic dimensions of long-term returns – reward, risk, cost and time – and must apply them to every asset class. Never forget that these four dimensions are remarkably interdependent. – John Bogle
The stock market continued its downward trajectory for the third straight week but the losses were modest for the S&P 500 Index and the technology-laden Nasdaq Composite Index while the Dow Jones Industrial Average closed virtually flat. Stocks rallied early in the week on positive news on a coronavirus vaccine and the announcement of several mergers. AstraZeneca resumed phase three trials in the United Kingdom for its vaccine candidate following stoppage due to safety concerns and Pfizer said that its vaccine could be widely distributed by year-end. There also were several acquisitions that were announced, including Nvidia buying chipmaker Arm Holdings, Gilead Sciences buying Immunomedics to expand its cancer treatments and Oracle taking a significant stake in TikTok’s business in the U.S. Although the economic data last week was mostly favorable, the market began its descent on Wednesday after the Federal Open Market Committee (FOMC) meeting. As expected, the Fed left the federal funds rate unchanged at between 0% and 0.25% and said that interest rates would likely remain at these low levels through 2023. It reiterated its policy of allowing inflation to run somewhat above its 2% target before raising rates to control inflation. But the Fed’s forecast doesn’t see inflation hitting its 2% goal until 2023. In the meantime, the Federal Reserve will continue to buy Treasuries and mortgage-backed securities and remain accommodative in an effort to support the economy as it slowly recovers. It was the uncertainty over the strength of the recovery and comments by Fed Chairman Jerome Powell that may have spooked the markets. He said that the economy could suffer from continued high unemployment that could result in higher evictions and foreclosures, especially without additional stimulus from Congress. With both sides of the aisle at a stalemate, it doesn’t appear that another economic relief package will be passed before the election on November 3rd, causing even more uncertainty.
U.S. retail sales rose for the third consecutive month but were slightly below forecast, raising concern that gains in the months ahead could slow unless another stimulus bill is passed. Industrial production and leading economic indicators also increased in August but were less than in the previous two months as the economic recovery may be losing steam. The Empire State Manufacturing Index for September was much better than expected and the University of Michigan consumer sentiment index was at its highest level since March and exceeded expectations. Although weekly jobless claims were still high at 860,000, they were better than expected and less than in the previous week.
China reported its first retail sales increase for the year as retail sales exceeded 2019 levels for the first time since the outbreak of Covid-19.
For the week, the Dow Jones Industrial Average closed virtually flat at 27,657 while the S&P 500 Index declined 0.6% to close at 3,319. The Nasdaq Composite Index also dropped 0.6% to close at 10,793.
August existing home sales are expected to be slightly higher than those in July, which registered a record high, while August new home sales are expected to be slightly less than those in July, which reached their highest levels since December 2006. Durable goods orders in August are forecast to increase only modestly after a strong July.
The most prominent companies scheduled to report earnings this week are General Mills, Costco Wholesale, Nike, Darden Restaurants, KB Home, Cintas, Autozone and CarMax.
The weakness last week in the stock market might have been partly attributed to the fact that the Federal Reserve offered no new monetary policies to help stimulate the economy. This disappointment coupled with the Fed’s announcement that interest rates would remain near zero through 2023 might have also indicated to investors that the economic recovery may be slow and uneven. The Federal Reserve can only do so much and it has maintained all along that it will do whatever it takes to help support the economy by remaining accommodative. The Fed could certainly thwart the recovery by prematurely tightening monetary policy but Fed Chairman Jerome Powell said at their meeting that this definitely would not happen. What the economy and the financial markets need now is fiscal stimulus from the government, which Powell has repeatedly asked for since the expiration of the Cares Act economic relief package at the end of July. Unfortunately, partisan politics in Washington have prevented Congress from agreeing on another stimulus bill and it now appears one won’t be passed before the election. The passing of Supreme Court Justice Ruth Bader Ginsburg over the weekend only adds to the rancor between Republicans and Democrats on filling her vacant seat and increases the probability that a deal won’t be reached. This added uncertainty will undoubtedly affect market sentiment over the near term and lead to increased volatility if there is no agreement.