In normal times, August offers a bit of a reprieve, both from the office and from volatility in the markets. But as has all too often been the case in 2020, little has gone according to plan and the usually quiet month of August was no exception. Markets rallied sharply, with the S&P 500 hitting new records mid-month and going on to add 7% for the period, the best August in 34 years. The Nasdaq did that one better, climbing 9.6% on the relentless rise of tech stocks.
Inquiring minds will want to know: are these returns supported by events? As always, you can find data to support almost any point of view, but in general the numbers were encouraging. The July jobs report was good, but not great, with the economy adding 1.8 million jobs, down from 4.8 million the month before, and the unemployment rate falling to a still staggering 10.2%. New jobless claims fell below one million for the first time since the start of the pandemic. Durable goods showed a V-shaped recovery, rising 11.2%, while consumer spending rebounded more than expected, with real consumption up 1.6%, proving more resilient to the renewed surge in coronavirus cases than many expected.
The U.S. Federal Reserve was back in the headlines, weighing in from its virtual Jackson Hole conference. This was the first time since the meetings were initiated in 1982 that it had not met in person at the Wyoming resort. But that wasn’t the only news – more significantly, Fed Chairman Powell previewed the central bank’s new, more relaxed take on inflation, a policy that would supersede the long-running commitment to raise interest rates preemptively to head off inflation.
Going forward, Powell indicated, the Fed would tolerate a temporary rise in inflation above its 2% target as a way to compensate for the extended period of low inflation and high unemployment we have experienced. The effect of this is to suggest that interest rates will stay near zero for some period of time, possibly many years. In turn, treasuries reacted less to the Fed’s announcement and more to the exigencies of the real world, where a growing federal deficit drove increased borrowing. The 10-year sold off around a mid-month sale of $38 billion of notes, though at 0.669% yields remained low by historical measures.
The Fed wasn’t the only institution to go virtual in August; both the Democrats and the Republicans held their conventions in a mostly virtual format, another coronavirus-driven first. Election season is now officially underway with all the potential for market volatility that portends.
Not to be forgotten, the trade dispute with China continued to simmer in the background, most recently manifested by that country’s decision to sanction 11 U.S. citizens in response to measures taken by Washington in the wake of Beijing’s crackdown on Hong Kong. Trade is another issue that could bubble to the surface at any time in the rough and tumble of the election. Gold, which has been on a record tear this year, showed signs of backing off those highs as August drew to a close, with investors focusing more on improving economic data and hopes for a coronavirus vaccine.
Another event that during a normal “quiet” August would have received the lion’s share of attention: a change in the composition of the venerable Dow Jones Industrial Index. Exxon, which has been part of the Dow since 1928, is being replaced by the software company Salesforce. Once the world’s biggest company by market cap, Exxon has seen its value drop from a peak of around $500 billion in 2007 to around $180 billion today. In a sign of the times, energy as a component of both the Dow and the S&P 500 has similarly declined to be replaced by technology. Salesforce was added to the Dow to compensate for the drop in technology weight that arose from the Apple 4:1 stock split. As a reminder, the Dow is price weighted so a drop in price (even if only due to a split and not to a decline in the total market capitalization of the company) will reduce its weight in the index.
A major change among a time of ongoing major changes. August was anything but quiet and the noise level will surely only rise in the months to come.
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