Posted September 2, 2020
The month of August was largely a continuation of July’s positive trend. Equity investors logged another positive month, with various broad categories of stocks returning between 2% and 7% for the month. Once again, large US technology stocks were the winners. Their continued climb has powered the overall US stock market to finally breach their previous all-time highs set in mid-February.Even as August’s continued recovery has been wide-reaching, one of the things that stands out when looking at the complete year is the striking differences between the performance of different kinds of stocks. The energy sector is still down over 28%; financials, utility stocks, developed-market foreign stocks (large- and small-cap) and domestic small-cap stocks are also down for the year. Biotech, homebuilders, and technology stocks, on the other hand, have offset that drag and continue to push the market recovery upward.
Bonds and the Federal Reserve
Bonds, which have been tremendously helpful investments this year, gave some of their gains back this month as yields rose modestly. After the yield on the bellwether ten-year US treasury bond touched 0.50% at the beginning of August, its direction reversed and ended the month at 0.71%. Interestingly, Fed Chairman Powell announced a major policy shift near the end of the month, stating that the Federal Reserve would let inflation run above their 2% target before raising rates, in an effort to make up for prior years when inflation came in below the Fed’s target of 2%. While this policy shift should mean that the short-term interest rates stay lower for longer, the market responded by pushing longer-term rates higher. This rise in rates could be a signal that longer-term yields will finally be heading back to more normalized, pre-COVID-19 levels. If the stock market rally continues in anticipation of an economic recovery, then it would make sense that the bond market should at least begin to reflect a recovery scenario as well.
Elections and the Market
Finally, August marked the national conventions of both major US political parties. With about two months left before the 2020 presidential election, investors are increasingly focused on likely outcomes and what impact those outcomes will have on financial markets. While we expect to discuss this topic further in future letters, readers should know that:
1) US equity markets on average have historically done well regardless of which political party is
in power, and
2) Based on the current balance of power, only a few scenarios could meaningfully alter the
status quo (e.g. Democrats regaining the presidency and the Senate, retaining control of House,
and repealing the Senate’s filibuster rule).
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