The market rally continued its upward climb this week, with technical levels breached, meaning more gains are likely ahead. Aided by some positive earnings news, a potential decline in the spread of COVID, and possible breakthroughs in treatment options and vaccines, the bears appeared to be finally capitulating to the nascent bull market. Economic data further underpinned the positive tone, with durable goods orders accelerating more than double the forecast, and pending home sales jumped the most since 2005. Meanwhile, initial jobless claims dropped from last month’s reversal higher, but remain above 1 million for last week, while ongoing claims moved lower, showing a mixed picture for the labor market and therefore the US consumer. Unemployment will remain a key focus for markets, particularly as Washington continues to drag out negotiations on additional aid to US workers, without which millions would find it difficult to cover even basic living expenses.
A key announcement was unveiled this week at the Fed’s annual policy symposium, typically held at Jackson Hole, Wyoming, but held virtually this year for the public to see. Fed Chair Jerome Powell, in line with expectations, declared the central bank would now target an average of 2% inflation over time, allowing employment and inflation to rise higher than traditionally sought, and indicating that rates would be at or near zero for a considerable period. This change would allow for inflation to rise higher before the bank takes action, in an effort to raise the average rate over time. The Fed also expanded it’s goal of maximum employment to specifically acknowledge those that have fallen behind, namely lower income and minority households. The moves boosted risk appetite further, with equity markets adding to their gains for the week, and longer-dated bonds selling off. While this change in direction was largely anticipated by investors, the clarification has profound implications for anchoring expectations. Interest rates will remain low for the foreseeable future under this policy, until inflation rises and sustains a meaningfully higher base. This represents the largest policy change in some time, and provides clearer guidance for the future of interest rates, bonds, and equity pricing.
There remains extremely divergent opinions on the state of the market, with some calling it a bubble about to burst and others believing this is just the beginning of a new bull run. Some investors are hoarding cash waiting for the next crash to take advantage of lower prices, while still others are racing to add to risk assets for fear of missing out on the rally. As we have stated previously, we are in neither of these camps, finding stocks to be marginally expensive but not in bubble territory. To maintain balance and not overshoot our risk parameters, we are continuing to rebalance portfolios back to their longer-range targets as markets fluctuate. Should the hot streak continue, we will trim risk positions, and should a substantial drop occur, you will see cash being deployed from the sidelines. We continue to hold an above average amount of liquidity to remain flexible in what is a very tenuous market environment. 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.