10-15 Associates

Not a Sleepy Summer for Financial Markets

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U.S. stocks closed mostly lower on the last trading day of August, but Wall Street recorded its strongest August returns in decades as vaccine hopes kept investors pushing equities to fresh highs. The 7.57% gain in the Dow for the month, fell just short of closing in positive territory for the year. The S&P 500 pushed farther into positive territory, adding 7.01% for the month, and the Nasdaq gained more than 9% for a total gain for the year of 31.24%.

This is a continuation of what we have been seeing. Over the past five months, the Dow has advanced 29.7%, its biggest 5-month percent gain since July 2009. The S&P 500 added 35.4%, its best 5-month run since October 1938. The Nasdaq led the way by advancing 52.9%, booking its strongest 5 months since March 2000, according to Dow Jones Market Data.

With the market continuing its advance to new heights, many are now asking, “What could be driving the market higher?” The S&P 500 clinched its best August return since 1986 and the Dow, its best return for that month since 1984, meanwhile the Nasdaq recorded its strongest August since 2000. Much of the strength has been attributed to hopes for vaccines and treatments for the COVID-19 pandemic that has debilitated economies across the globe. The S&P 500 and Nasdaq have continued to notch records as risk assets shrug off the economic damage wrought by the coronavirus.

Adding to the optimism around potential coronavirus cures, the Food and Drug Administration’s commissioner, Stephen Hahn, said the U.S. could fast-track a trio of vaccines. The FDA boss, in a weekend interview with the Financial Times, insisted there are safe ways to make a vaccine available before the end of final stage trials, potentially by issuing an emergency authorization for use by certain groups, rather than achieving a blanket approval.

Still, this comes ahead of a seasonally weak month for stocks in September, which could be amplified by worries about a COVID-19 resurgence in the fall and winter, the stalemate in Congress over additional pandemic aid, and by turbulence fostered by the U.S. presidential election. Once more, the closely tracked CBOE Volatility Index, or VIX, rose 14.5% Monday, which has climbed in October ahead of each of the past seven presidential election years since 1992.

In terms of labor, private companies added 428,000 jobs in August, down from the levels we saw in May and June, as the coronavirus pandemic lingers and businesses struggle to return to normal. Hiring was strongest across large businesses, which accounted for 70% of new jobs in August. Small businesses, meanwhile, added just 52,000 jobs, the fewest since the job market began to recover from April shutdowns and highlighting the ongoing pain across a sector that represents about half of all U.S. jobs.

Trading on the last day of August followed last week’s important declaration by the Federal Reserve, that it would use an average inflation target as a part of its monetary policy. The shift implies the central bank would pursue lower rates for a longer period, even if the unemployment rate, which is historically associated with rising price pressures, started to fall substantially.

Monday also marked key changes to the Dow components precipitated in part by Apple Inc.’s 4-for-1 stock split. The Dow is a price weighted index, therefore giving greater emphasis to higher priced companies. When a company chooses to split its stock, it changes the impact on the overall performance of the index. In order to offset some of the impact, several names were changed including the addition of Salesforce.com Inc., Amgen Inc. and Honeywell International Inc. These took the place of Exxon Mobil Corp., Pfizer Inc, and Raytheon Technologies Corp. The last time there was a major change in the index was back in 1997, when two of the four changes included the addition of Walmart for Woolworths and Johnson and Johnson replaced Bethlehem Steel. It was only four years ago that Apple became a member of the Dow, replacing AT&T (formerly SBC Communications).

August was a historic month for financial markets. Investors continued to embrace the positives and see through the current weaknesses in the economy and look forward with hopes of a strong recovery. With support from the Federal Reserve, continued hope for more stimulus and virus fears subdued by hopes of a vaccine, buyers outstripped sellers, pushing stocks higher. As attention transitions to the election and the overhang of the virus continues to take its toll, investors will face renewed challenges to their optimism.

As we celebrate our Labor Day holiday we can hope for those that have been displaced by this virus to find work!

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