Markets Retreat after the Fed Chairman Said This

Welcome to fall 2020! Stocks rallied early last week, then fell after the Fed meeting on Wednesday. Last week all indexes finished flat or down. The Dow barely dropped 0.03%, S&P was down 0.64%, and Nasdaq down 0.56%. Tech stocks continued to sell off, leading to the Nasdaq’s 3rd straight weekly decline.

Last Week

The markets see-sawed through the week before finishing lower. Stalemate in Washington over any kind of relief bill continued. The Fed meeting on Wednesday was highlighted by projections to keep interest rates near zero through 2023. Economic data missed the mark too. Retail sales came in lower than expected. The weekly unemployment claims came in higher than expectations of 860,000. Housing starts and building permit data came in lower than expected. The decline of housing data compared to July is likely attributed to higher lumber prices.

More on the Fed. Low interest rates enhance the value of all equities. The Fed indicated this past week that it intends to keep its overnight federal funds rate target at 0-0.25% until 2023. They also said they would continue purchasing Treasuries and agency mortgage-backed securities. Chairman Powell said they will keep this stance until the labor market returns to full employment. Pre-covid unemployment rates were 3.5%.

The Week Ahead

The Federal Reserve chairman, Jerome Powell, speaks on Tuesday. Many agree the recovery has slowed, so to what degree that slowing has occurred will be seen in the latest reports. Fed chair Powell’s testimony on the CARES Act could contain market-moving morsels on Tuesday and Wednesday, as could treasury Secretary Mnuchin’s testimony on Thursday. Another week of high unemployment claims looms, but so far, the market remains relatively content with the labor market’s status. Friday’s durable goods orders offers insight into capital expenditure intentions among companies, and it’s poised to decline slightly. The elephant in the room for the market is the Presidential election, now roughly 6 weeks away.

Looking ahead to October. October is a peculiarly dangerous month to speculate in stocks. According to the Trader’s Almanac, that is especially true in presidential-election years. Since 1952, the Dow industrial averaged a 0.8% decline in those years. The S&P 500 index averaged a 0.7% drop. In Octobers of election years, the market was generally up when the incumbent party won. Not surprising as bull markets tend to favor the party in power. Clarity on the next 4 years will be here soon! Year-to-date index performance; Dow down 3.09%, S&P up 2.75%, and Nasdaq up 20.29% through the close on Friday.

Have a great week!

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