COVID-19 Market Update: What the US Fed’s Economic Policy Symposium Reveals About Inflation, Interest Rates

Equity markets continued to slog higher last week. The TSX is up 42% from the bottom in March, moving closer to break-even for the year, down only 2%. The S&P 500 added another 3.3% during the week bringing the year-to-date to 8.6%. The equity leader year-to-date is the technology-laden Nasdaq up 3.39% for the week and over 30% year-to-date. The broader S&P MidCap 400 and the Russell 2000 rallied 1.90% and 1.71% respectively, with year-to-date totals still in negative territory, down 5.65% and 5.40%. News on prospective vaccines for COVID-19 boosted companies most harmed by the outbreak and subsequent lockdowns. Airlines and aircraft manufacturing jumped in anticipation of the resumption of travel. Value stocks continued to fall behind higher valuation growth stocks, and large caps outclassed small caps.

Positive economic news offered some support to equity markets, with US consumer spending up 1.9%, beating economists’ forecasts of a 1.6% increase but losing steam from May and June. New applications for jobless benefits fell to 1 million, declining by 98,000 from the previous week. The continuing claims for the seven days ending August 15 came in just below 14 million for the first time since the COVID crisis. What remains uncertain is the impact of the expiration of the $600 federal unemployment bonus over state benefits. President Trump authorized a temporary federal $300 payment, but states appear to be slow in offering and administering the additional payments. It is increasingly likely a new stimulus package is not possible before the upcoming US elections in November.

July US durable goods came in stronger than expected at 11.2%, primarily driven by transportation and topping the 4.8% forecasts. Stripping out autos and airplanes, new industrial orders rose just 2.4%. Auto sales in the US leaped 22% in July after a 24% gain in June. As previously expected, third-quarter US GDP real-time estimates by the Atlanta Federal Reserve shows a jump by an annualized 26% following the second-quarter contraction of 32% annualized. While the year-to-date claw-back is 5% below pre-corona levels, the positive bounce in Q2 GDP is a good indication the US is on the road to recovery. In Canada, the second quarter GDP fell 39% annualized; however, monthly data for June and July came in at 6.5% and 3%.

The housing market continued to show strength both in the US and Canada. New and existing housing is surpassing pre-COVID levels in the US, and in Canada, according to the Real Estate Association1, home sales in July hit a record high going back more than 40 years. The exodus from the cities is happening for several reasons. Historic low-interest rates have certainly contributed to the suburbs being more affordable. The shift resulting from the health and safety issues stemming from the uncertainty of COVID and potential treatments is causing families to re-consider city center life for raising a family. The US adds personal and property safety as another reason to want to leave the cities for a more peaceful life in the suburbs or country.

At the traditional summer gathering of the US Fed’s Economic Policy Symposium held this year in Kansas City rather than Jackson Hole, the monetary policy review results revealed little. The major announcement was that the annual 2% inflation target adjustment would become an average over a period. That statement was interpreted to mean inflation potentially could be “moderately” more than 2% for periods to bring the average to 2%. They also revised their policy regarding employment, suggesting a more accommodative interest rate environment during periods of high unemployment and they may not raise rates to slow the economy because unemployment is low. These policy adjustments suggest interest rates will be down for a considerable time and much longer than previously thought by most market analysts.




Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

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