It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance. – Warren Buffett
The stock market ended the week on a high note with a strong rally on Friday but it wasn’t enough to prevent the S&P 500 Index and the Dow Jones Industrial Average from posting their fourth straight losing week. The Nasdaq Composite Index bucked the trend and closed higher for the first time in four weeks as investors gravitated back to technology stocks that had sold off recently. Despite Friday’s rebound, though, the S&P 500 is still down nearly 6% in the month of September as investors face a number of uncertainties. A major concern is a possible resurgence of coronavirus cases in the U.S. after Europe reported a spike in cases and the United Kingdom was reportedly considering another national lockdown to halt an increase in infections. These worries surfaced despite growing optimism from Dr. Anthony Fauci that scientists will find one or more safe and effective vaccines by year end or early 2021 with enough vaccine doses by April. Moderna, Pfizer, Johnson & Johnson and AstraZeneca are all currently working on getting a vaccine as quickly as possible. There also is growing concern that the economic recovery might be in jeopardy unless another economic relief package can be passed by Congress. Federal Reserve Chairman Jerome Powell has made it clear that the Fed is committed to using all of the monetary policy tools at its disposal to ensure that the economic recovery is as strong as possible. But economists and the Fed have also argued that an additional economic relief package is needed to keep the recovery on track. Negotiations in Congress over a new coronavirus stimulus bill could become even more contentious after the passing of Supreme Court Justice Ruth Bader Ginsburg and the upcoming confirmation hearing of President Trump’s nominee, Amy Coney Barrett. Democrats in the House of Representatives have prepared a $2.4 trillion stimulus bill that is far less than their original bill but the amount still exceeds the targeted bill of about $1 trillion that the Republicans have proposed. With a presidential election also looming in less than 40 days, it’s safe to say that the financial markets will continue to be volatile in the weeks ahead.
Existing home sales increased for the third straight month in August with the fastest pace of home sales recorded since December 2006 as home buyers took advantage of low mortgage interest rates. New home sales in August were also strong as they jumped to their highest level in 14 years. With housing demand strong for both new and existing homes and supply limited, prices are increasing, which will eventually affect affordability. Durable goods orders rose for the fourth consecutive month in August but the increase was modest and less than expected after a large gain in July. Weekly jobless claims were 870,000 compared to expectations of 850,000.
For the week, the Dow Jones Industrial Average declined 1.8% to 27,173 while the S&P 500 Index fell 0.6% to close at 3,298. The Nasdaq Composite Index rose 1.1% to close at 10,913.
The most important piece of economic data this week will be the September employment report, which is expected to show that 933,000 jobs were created and that the unemployment rate dipped to 8.2% from 8.4% in August. The September ISM manufacturing index is expected to be solidly in expansion territory while the final estimate for second quarter gross domestic product (GDP) should show that the economy contracted at an annual rate of 31.7%. The Consumer Confidence Index for September is forecast to jump to 90, slightly less than the post-pandemic high of 91.7 in July.
The most notable companies scheduled to report earnings this week are McCormick, Conagra Brands, Constellation Brands, PepsiCo, Bed Bath & Beyond and Micron Technology.
After gaining over 7% in August for its best performance in the month in 36 years, the S&P 500 Index has lived up to its reputation in September of being the worst performing month for stocks. At last week’s low, the benchmark was down 10% from its recent high as the S&P 500 ended the week with its fourth consecutive weekly loss. The technology-laden Nasdaq Composite Index, whose mega-cap tech shares had become overvalued and had benefited from the shelter-in-place rules of the coronavirus pandemic, dropped even more at its low, falling about 14% from its recent high. Since the beginning of September, though, value-oriented sectors that would benefit from an economic recovery have outperformed growth sectors such as technology. Cheaper and more economically sensitive sectors such as materials, energy and industrials as well as other cyclical stocks would fall into the value category. Recent optimism about a vaccine as well as stronger than expected housing and manufacturing data and improvement in the labor market are positive signs that the economic recovery is gaining traction. Many analysts are also raising their corporate earnings estimates for the fourth quarter, which is bullish for stocks. With an accommodative Federal Reserve that has reiterated time and time again that it will do whatever it takes to bolster an economic recovery, the stock market correction may have run its course and could be poised to move higher. Although there are certainly risks around the upcoming election and a possible resurgence in coronavirus cases this fall, the market may have put in its low last week. Historically, the stock market tends to rise in the fourth quarter and even more so in years when there is a presidential election.