Market & Economic Outlook
Key Highlights and News
What to Keep an Eye On
Falling Yields and Rising Equities
Markets appear to be following second quarter trends thus far in the third quarter. 10-Year Treasury yields fell to 52 basis points on August 4 and real yields, or yields adjusted for inflation, continued to remain in negative territory. The paucity of yield in traditional safe haven asset classes encouraged continued investor interest in risk assets, including investment grade and high yield corporate bonds and domestic and international stocks.
Investor interest also appears to be widening beyond U.S. large cap equities to other asset classes: for the three months ending July 31, according to Morningstar Direct, returns from small cap U.S. equites and emerging market stocks have edged out the 12.9% return of the S&P 500 index. We are also seeing tentative signs of investor interest in beaten-down cyclically-sensitive value sectors as green shoots of an economic recovery emerge. One example is the strong performance of the Dow Jones Transportation Average, up some 12% in the last month, based on strong performance from airline, trucking and rail companies.
Meanwhile, the Fed is expected to continue to do its part to boost the economy by keeping rates at current levels during its Federal Open Market Committee meeting on September 15-16. While inflation has trended slightly higher in recent months, it remains below the central bank’s 2% target despite aggressive monetary interventions totaling over $2 trillion as the economy continues to suffer from the coronavirus pandemic.
One Fed response, which may be announced as soon as the next FOMC meeting, is to shift its policy from a hard 2% inflation target to an average inflation target calculated over a business cycle. Outcome-based forward guidance that provides reassurance rates will be kept near the lower bound in the future is another confidence-boosting tool the Fed may unsheathe next month.
Shopping and Candidates
Because of the critical role consumers play in the U.S. economy, close attention is paid to monthly retail sales figures. After a drop totaling 23% in March and April, retail sales have staged a three month rebound—up 18% in May, 8% in June and 1% in July. While the 1% July increase appears tepid, it is important to note that the retail sales control group used to calculate Gross Domestic Product posted a significant jump in July, increasing on an annual basis by 8.0% year-over-year. This was the largest monthly jump since 1999.
With retail sales now rising for three straight months the underlying trend seems encouraging but it does conceal certain problems.
First, there has been a significant overhaul in the retail industry this year with many large and well-known retailers filing for bankruptcy protection and, in the future, consumers may have fewer places to spend their money. Second, much of the spending over the past three months was fueled by government aid. According to the Department of Labor, more than 30 million American workers are now receiving some type of state or federal assistance due to the pandemic and, while the economy has added 10 million jobs, 13 million additional jobs would need to be added before reaching pre-pandemic levels. With unemployed workers no longer receiving the $600 benefit and little prospect of another $1,200 check from the government, the true test of retail sales will be in the months ahead.
As the countdown to the U.S. presidential election enters its final months, investors may turn from considerations of retail sales, corporate earnings and bond yields to handicapping the results and weighing the pluses and minuses of various electoral outcomes. But elections themselves have little bearing on the paths markets and the economy take. Assets tend to appreciate as the economy grows, and U.S. GDP has persistently increased over time regardless of which party has been at the helm.
Any number of factors, from election results to economic data points, may influence short-term market moves in either direction. As investors, however, we should not let potential volatility from both good and bad news derail our plans. History has shown that staying the course for the long-term means asset growth over time. The most important determinant of a successful investment plan is an approach aligned with your unique set of goals, risk tolerances and time horizon.
Economic and Market Perspectives is a publication of HighMark Capital Management, Inc. (HighMark). This publication is for general information only and is not intended to provide specific advice to any individual or institution. Some information provided herein was obtained from third-party sources deemed to be reliable. HighMark and its affiliates make no representations or warranties with respect to the timeliness, accuracy, or completeness of this publication and bear no liability for any loss arising from its use. All forward-looking information and forecasts contained in this publication, unless otherwise noted, are the opinion of HighMark, and future market movements may differ significantly from our expectations.
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