Markets moved higher this week, with the S&P 500 nearly eclipsing a key technical level of 3,400, but ultimately failing to maintain gains. Optimism continues to keep stocks elevated, and typically markets that breach their records tend to move even higher, adding to bullish sentiment. The positivity comes on the back of several surprising data points including consumer spending, housing, and business optimism. Investor surveys are also indicating a capitulation of bearishness, with a Bank of America survey showing positive sentiment around the economy, markets, and lower cash positioning. July housing starts were the highest since 2016, with consumers flocking to take advantage of low rates as some flee out of cities due to COVID. Housing remains a considerable force in the economy, as purchases tied to new housing are substantial and add significantly to consumer spending. On the other side of the housing equation, however, mortgage delinquencies reached a four decade high this week, at 16% of outstanding loans by the FHA. Fortunately, those borrowers are protected by a federal forbearance program that allows delayed payments for up to a year. Perhaps most alarmingly, unemployment claims once again ticked up to over one million this week. Meanwhile, the dollar has continued its decline, with effects ranging from potential increased revenues for multinationals to higher costs for US consumers.
Policy developments were expected out of Washington this week from the Fed, with inflation the main focus. Investors were caught off guard by the downtrodden guidance, as the Fed reiterated that COVID would continue to weigh heavily on growth and employment and potentially pose risks to the financial system. Most assumed the Fed would announce their anticipated change to their inflation framework to target average inflation over periods of time instead of maintaining any given level of inflation in the near term, as they have failed to reach their objectives for most of the past decade. This would be a significant change to forward guidance and would allow for the Fed to run inflation higher over longer periods to offset other times of low inflation. This “inflation averaging” strategy would be a marked departure from the past and could disrupt fixed income markets in particular. As a part of this effort, many also are expecting the Fed to explicitly adopt yield curve control, where the Fed’s bond purchases are targeted to create a specific yield curve that aligns market expectations with the Fed’s goals. This strategy has been used in the past, though not since World War II in the US. Though neither yield curve control nor average inflation targeting were announced in this week’s minutes, investors expect these changes in the coming months, with big implications for markets.
While many analysts and Wall Street firms are now calling for new highs for equity benchmarks, increased volatility is also likely due to the upcoming election and large tail risks such as more COVID disruptions on the economy or trade issue flare ups. We remain optimistic, but would prefer to be prepared for disruptions and not chase returns. Small adjustments to portfolios where we see shifts in momentum are being made within the allocations, but no major changes are underway at this time. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.