Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services
Weekly Market Performance Snapshot (Week ending August 28, 2020 & Year-to-Date)
- Dow Jones Industrial Average®: +2.6% / +0.7%
- S&P 500® Index: +3.3% / +8.6
- NASDAQ Composite® Index: +3.4% / +30.3%
- Russell 2000® Index: +1.5% / -5.5%
- 10-year U.S. Treasury note yield: 0.729%, up 8.9 basis points from 0.640% on August 21 and down 119 basis points from 1.92% on December 31
- Best-performing S&P 500 sector this week: Communication Services, +4.8%
- Weakest-performing S&P 500 sector this week: Utilities, -0.7%
Equity Markets Move on Health News, While Valuations Continue to Grow
The S&P 500 Index and NASDAQ Composite Index continued to reach new record highs this week, while the Dow Jones Industrial Average climbed into positive territory for the year. Investor confidence on the health front rose, as new U.S. coronavirus cases remained below the summer surge levels, and the U.S. government approved another potential COVID-19 treatment, plus a new rapid diagnostic test. The Federal Reserve’s announcement to change its interest rate targeting policy also pushed equity markets higher, as investors expect interest rates to remain low for an extended period.
- The U.S. government announced emergency use authorization (EUA) for a COVID-19 treatment derived from the blood plasma of patients who have recovered from the disease. The number of tools available for treating COVID-19 has grown over the past six months, leading to increased market optimism.
- Abbott Labs introduced a coronavirus test that can deliver results in just 15 minutes at a cost of $5. The U.S. government plans to purchase 150 million tests. The test’s potential to bring more certainty to diagnosing infections points toward resuming normal economic activity, which serves to boost investor confidence.
- The Dow Jones Industrial Average (Dow) announced that three stocks (ExxonMobil, Pfizer, and Raytheon) will be exiting the index, as three new stocks (Salesforce.com, Amgen, and Honeywell) are added, effective August 31.
- The move was driven by Apple’s upcoming 4-for-1 stock split. Because the Dow is price-weighted, Apple’s lower price after the split would have reduced the technology sector’s representation in the index.
- Making changes to the companies included in the Dow doesn’t change the value of the index. However, ExxonMobil’s replacement by Salesforce.com reflects shifting economic and market trends, as technology surpasses energy as a major economic engine.
- Salesforce.com rose on news of its inclusion in the Dow. The stock then skyrocketed following a strong quarterly earnings report, adding around $50 billion of market value in a single day—a jump of 25%.
- The rapid price appreciation of Salesforce.com’s stock is the latest example of how equity valuations are being stretched in the current market environment. According to FactSet, the forward price-to-earnings (P/E) ratio for the S&P 500 is nearly 26—a mark last hit in September 2000 during the dot-com bubble.
- Amid continuing uncertainty, investors should speak with a financial professional about positioning their portfolios for the future.
Policy Change at the Federal Reserve, While Economy Awaits Further Fiscal Support
In a speech Thursday, U.S. Federal Reserve Chairman Jerome Powell announced a shift in the Federal Reserve's approach to targeting inflation. While the 2% inflation target will remain, the Federal Reserve (the "Fed") will now aim for an average inflation rate of 2%. The Fed will now tolerate inflation above 2%, as long as it remains below 2% for an extended period of time.
- The Federal Reserve’s dual mandate from Congress is to promote stable prices and maximum sustainable employment. Economic theory holds that prices rise as the economy reaches full employment because businesses have to spend more to hire additional workers. However, inflation has remained mostly below the Fed’s 2% target since the end of the 2008-09 recession, even as the economy reached record levels of employment. This suggests, Powell said, that “a robust job market can be sustained without an unwelcome increase in inflation.” Therefore, an improving job market wouldn’t necessarily require the Fed to raise interest rates in anticipation of rising prices.
- Equity markets rose after Powell’s statement, seeing it as an indication that the Fed will not rush to raise interest rates even as the economic recovery gains traction.
- It remains to be seen how much traction this recovery has, as weekly jobless claims have topped 1 million for 22 out of the previous 23 weeks, and around 14.5 million Americans are receiving unemployment benefits.
- Both parties in Washington hinted at the possibility of reaching agreement on the next round of fiscal stimulus, though the timing is unclear.
- The U.S. economy could be currently sustaining damage that won’t be revealed in full for some time. For instance, the longer workers remain detached from jobs, the harder it may be for them to return to the workforce. Businesses in hospitality and retail that have borne the brunt of economic closures may have trouble recovering. These trends could weigh on future economic growth and market performance.