A Strong August and The Fed Makes History

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Marco Fragnito, Managing Principal | Robert R. Fragnito, Chief Operating Officer & Financial Advisor

KEY POINTS:

• August witnesses record highs for markets as September showing signs of a brief pause.
• The Fed’s historic shift will set the tone for lower interest rates for some time to come.

EQUITY MARKET

The S&P 500 rose for the fifth straight month setting an all-time high and recording its best August since 1986 rising 7.0%. The Dow Jones Industrial Average also continued to rally gaining 7.6% while the NASDAQ Composite hit new all-time highs on multiple trading sessions rising a strong 9.6% for the month. Growth stocks continued to lead the way higher, although signs are beginning to emerge of some froth in prices of some stocks. Continued positive economic data, accommodative central banks and positive news on the COVID-19 front provided the catalysts for the advances.

More importantly, the Federal Reserve announcing a significant shift in its monetary policy framework at its annual Jackson Hole symposium further drove markets higher. We will be releasing a research brief addressing this shift and why it is so significant in the coming weeks. Wall Street’s initial interpretation was that going forward, the Fed would follow a policy of “prolonged” lower interest rates, but in our opinion, rates will remain lower for a significantly longer time.

With a continued lack of further stimulus coming from Congress, due to political posturing by both parties, along with lingering U.S. China tensions and a Presidential election 60-days away, market volatility and risk remained above historic norms. 

FIXED INCOME

Continued improving economic data combined with the shift in the Federal Reserve’s monetary policy framework pressured US Treasuries yields higher across the yield curve. The Fed’s shift, in our view, may ultimately lead to the implementation of other monetary policy tools such as the yield curve control. In addition, the new monetary framework could over time create more volatility in fixed income markets, but ultimately will prove greatly beneficial for our economy and more importantly, for US labor markets and individuals.

MARKET OUTLOOK

We remain positive on equity markets; however, we would caution investors to be cognizant of over exposure to sectors of the market that have risen strongly over the last 5 months. We at MCF expect investors to rotate out of such sectors and shift into more economically sensitive ones. This is necessary for equity markets to continue to rise. Over the longer term we continue to favor growth stocks over value, but in the short term, they have had extraordinarily strong appreciation and need to pause before moving higher.

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DISCLAIMERS

The opinions expressed here reflect the judgement of the author(s) as of this date and are subject to change without notice. Information presented here is for informational purposes only and does not intend to make an offer, solicitation, or recommendation for the sale or purchase of any product, security, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here. The information being provided is strictly as a courtesy. 

SOURCES

Wells Fargo Advisors, Jack Kraft, “Monthly Market Commentary,” September 2, 2020.