Equities retreated this week, as investors digested stronger than expected economic data and continued progress in the fight against the virus. Following last week’s Fed announcement on average inflation targeting, markets have accepted that ample liquidity is here to stay, maintaining generally higher risk appetite. On the economic front, US manufacturing activity in August expanded well past projections to the highest level since late 2018, with the prior month’s reading adjusted higher as well. Additionally, unemployment claims data painted a rosier picture, with new jobless claims coming in lower than expected and continuing claims dropping by over a million workers as the labor market makes progress in healing. Dollar weakness remains, with foreign currencies appreciating on a relative basis, potentially boosting US export competitiveness but also consumer import prices. In the next few weeks, the most promising vaccines against COVID will reveal their results, potentially setting up for massive deployment in the months ahead.

In equity markets, large cap technology stocks continue to dominate gains despite the recent setback, with the largest firms leading the pack. The stay-at-home trade remains the dominate theme underpinning the upward climb, while “old-economy” firms face ongoing headwinds with consumers remaining cautious to re-engage with the world. We have concerns over certain names that have driven the run up, with momentum looking ahead of itself and the potential that small time investors and day traders are pushing particular areas of the market into bubble territory. Generally, we believe that markets are looking healthy but need to continue to see earnings drive higher from here to justify the lofty prices on stocks. Extremes are being seen in a number of indicators, from Relative Strength to a lack of bearish positioning, setting investors up for a potential near-term pullback. As we’ve preached for a while, volatility will likely return in the coming months, but ultimately equities will end higher in the year ahead, in our view.

While markets remain generally frothy at this time, we continue to believe there are opportunities available at more reasonable prices. Not all sectors of the market have participated in the rally, with many stocks still severely battered from the March selloff. In particular, select markets outside the US are looking increasingly attractive given the better response to the pandemic and a weakening dollar. Risk assets there continue to trade at multi-year discounts to US stocks, presenting a possible valuation opportunity. Other areas of interest are smaller company stocks and those that could benefit from a swifter reopening process. Ultimately, we’re remaining cautious heading into election season, knowing that potential volatility from a contentious outcome and the outstanding issue around unemployment benefits could spell trouble for the fragile recovery. With prices where they are, we’re prepared to take actions as necessary to prepare for a possible pullback. 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.