Market Update: Sep 17 2020
- Federal Rates
- Business Closures
- Economic Recovery
Here is a recap of our live Q&A session held on 9/17/20 presented by Joe Randazzo JD, CFP® from FNA Wealth Management and Dave Stone CPA, CFP® from Tartan Wealth Management.
Details for our next session, September 24th, can be found here.
I read this week that the Fed intends to keep rates low for the foreseeable future. How do you see that affecting the equity market?
While we want to look at low interests as a boost to the markets, we have to keep in mind that rates remaining so low for so long is a sign that the economy is not healthy enough to with stand rate increases. In other words, the federal reserve doesn’t manipulate interest rates to help the equity markets, but to help the economy. If they are projecting the economy needs help for that long, one might draw the conclusion that it’s weaker right now than markets are giving it credit for.
Low interest rates for the foreseeable future could certainly have a positive impact on the economy with low borrowing cost, but the positive impact flows to the equity markets if companies not only borrow the money and invest it back in themselves, but also if consumers maintain or even increase their buying activity. The August 2020 report on retail sales, released 9/16, showed a .6% increase in August vs a .7% forecast, and a .9% reading the prior month. While the economic recovery continues on track, I believe it would need to continue within a reasonable range for markets to benefit from lower rates.
You may also reasonably expect more demand for dividend paying or value stocks with lower rates. Many multinational banks, energy companies, and utilities are paying very attractive dividends when compared to long-term interest rates. So, where we have seen growth really lead the recovery for the last six months, affirmation by the Fed that rates will remain low could be the boost that value stocks I’ve been looking for.
In short, there’s no way to predict exactly how low interest rates will affect market performance. But there are certainly theories as to why rates are low and where money might flow in search of a higher yield.
Volatility has certainly subsided since your talk last week, was that the pullback you’ve been expecting and are we back off to the races?
The markets certainly presented a dose of reality the last couple of weeks before this week, but we don’t believe the volatility is over. We continue to see COVID numbers bounce around throughout the country and we continue to see modest at best economic activity. We saw earlier this week that a study by Yelp shows that 60% of businesses closed due to the coronavirus will likely be closed permanently. When you look at the types of businesses most affected - restaurants, small gift shops, clothing stores - the data seems to support a trend of consumers staying home. It is my opinion that the impact of all of these closures has yet to really trickle down to the economy, but we will likely see that happen.
In addition, even prior to the recovery we started to see over the last week or so, growth continues to trade at very high multiples. I believe what we saw with the selloff 3 or 4 days around Labor Day was a taste of what we will likely see in the next month or so, an additional pull back even from these levels. This certainly is not to say I am advocating pulling out of the market, rather continuing to dollar cost average to monitor your overall allocation and rebalance as needed.
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment. The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities. Past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss.
The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States. The Federal Reserve System is composed of 12 regional Reserve banks which supervise state member banks. The Federal Reserve System controls the Federal Funds Rate (aka Fed Rate), an important benchmark in financial markets used to influence the supply of money in the U.S. economy.
Value investments focus on stocks of income-producing companies whose price is low relative to one or more valuation factors, such as earnings or book value. Such investments are subject to risks that their intrinsic values may never be realized by the market, or such stock may turn out not to have been undervalued. Investors should carefully consider the additional risks involved in value investments. Growth investments focus on stocks of companies whose earnings/profitability are accelerating in the short term or have grown consistently over the long term. Such investments may provide minimal dividends which could otherwise cushion stock prices in a market decline. Stock value may rise and fall significantly based, in part, on investors' perceptions of the company, rather than on fundamental analysis of the stocks. Investors should carefully consider the additional risks involved in growth investments.
A plan of regular investing does not assure a profit or protect against loss in a declining market. You should consider your financial ability to continue your purchases over an extended period of time. Portfolios are rebalanced by buying and selling securities that have changed values in order to restore their original proportions in a portfolio. Rebalancing may result in a taxable event.