Rely on the ordinary virtues that intelligent, balanced human beings have relied on for centuries: common sense, thrift, realistic expectations, patience and perseverance. – John Bogle
The S&P 500 Index snapped its four-week losing streak last week and the Dow Jones Industrial Average and the Nasdaq Composite Index also advanced despite a continued stalemate in Congress over another economic stimulus plan. It was another strong quarter for the major stock averages as the S&P 500 was up 8.5% while the technology-laden Nasdaq Composite Index posted an 11% gain. In a last-ditch effort to reach a deal on additional economic relief, House Democrats released a $2.2 trillion bill and House Speaker Nancy Pelosi met with U.S. Treasury Secretary Steven Mnuchin. However, the amount was still well above what Republicans are willing to support and contained spending proposals not tied directly to the coronavirus pandemic. But the fact that the two sides were still talking was an encouraging sign. There were also concerns last week about a coronavirus outbreak in New York City as its daily positivity rate was back above 3% for the first time in months. News on Friday that President Donald Trump and first lady Melania Trump tested positive for Covid-19 was also disconcerting and only increased the amount of uncertainty facing the markets in the near-term. While the stock market initially plunged on the report, it managed to claw its way back during the day and closed only modestly lower. For the most part, the economic data last week was positive and confirmed that the economy is slowly recovering. Although the September employment report showed that 661,000 jobs were created, which was less than expected, prior months’ job numbers were revised higher and the unemployment rate fell to 7.9% from 8.4% in August. ADP also reported that private payrolls increased by 749,000 in September, topping expectations of 650,000. The economy will likely continue to recover on its own, but the passage of another targeted economic relief bill would hasten the recovery, buoy the stock market and eliminate some of the risk and uncertainty that has plagued the markets recently.
While the September employment report was somewhat disappointing, the payrolls miss was largely due to a drop in government hiring in state and local government education as many schools maintained at-home instruction due to the virus. The final estimate for second quarter gross domestic product (GDP) was modified to a 31.4% annualized decline but GDP is expected to rebound to an annual rate of 30% in the third quarter. The September ISM Chicago Purchasing Manager’s Index (PMI), a regional gauge of manufacturing activity, was at its highest level since December 2018 while the ISM manufacturing index was also solidly in expansion territory. Pending home sales in August were much higher than in July and rose to a record high as buying was spurred by historically low mortgage rates. The Consumer Confidence Index in September was much better than expected and much higher than in August.
For the week, the Dow Jones Industrial Average rose 1.9% to 27,682 while the S&P 500 Index gained 1.5% to close at 3,348. The Nasdaq Composite Index also added 1.5% to close at 11,075.
It will be a quiet week for economic data as the ISM non-manufacturing or services sector index for September is expected to be slightly less than in August but still firmly expansionary. The August Job Openings and Labor Turnover Survey or JOLTS report is forecast to show a total of 6.25 million job openings.
The Federal Open Market Committee (FOMC) will release minutes from its monetary policy meeting in September. Fed Chairman Jerome Powell will also give a speech on Tuesday at the National Association for Business Economics and will likely mention the need for additional fiscal stimulus.
Levi Strauss, Paychex and Acuity Brands are the only notable companies scheduled to report quarterly earnings this week.
In its effort to provide ample liquidity in the financial system and do whatever it takes to bolster the economic recovery during the pandemic, the Federal Reserve has slashed interest rates to near zero and has expanded its balance sheet by buying fixed income securities. These policies have resulted in positive returns for bonds this year as the Bloomberg Barclays U.S. Aggregate Bond Index has returned 6.79% through the end of September. (As interest rates fall, bond prices rise). As a means of comparison, the S&P 500 Index has produced a total return of only 5.57% for the first nine months of the year. While bonds have served as a ballast in client portfolios up until now, that might not be the case going forward. The yield curve right now is flat with Treasury yields at historic lows. The yield on the 2-year Treasury is only 0.13% and the yield on the 10-year Treasury is just 0.70%. The likelihood that yields fall further from these levels is extremely low while it’s almost certain that they rise from here, especially since the Federal Reserve has frowned on negative interest rates. Also, the Fed’s recent announcement that it would let inflation run above its 2% target would mean negative real returns for investors. In order to limit the damage in a potential rising interest rate environment, investors should keep the average maturity of their fixed income portfolios relatively short. With money market funds literally yielding next to nothing, short-term bond funds with a one-year average maturity yielding only 0.50% and intermediate bond funds yielding about 1%, investors should consider other alternatives in order to provide additional income. High dividend paying stocks and real estate investments trusts or REITs are two such investment classes that provide substantially higher yields but do come with added risk. The iShares Core High Dividend ETF (HDV) and the Vanguard High Dividend Yield ETF (VYM) have current yields of 4.0% and 3.6%, respectively, and invest in high quality, large cap stocks with above-average dividend yields. The Vanguard REIT ETF (VNQ) invests in companies that purchase real property such as office buildings, hotels, health care facilities and apartment buildings and currently yields about 3.8%. REITs also provide additional diversification in a portfolio as they typically behave differently than stocks and bonds.