Stock Market Update - Fall 2020
August 4, 2020 | Sage Capone
Stocks – What Do the Current Rallies Mean?
Stocks are enjoying a classic summer rally. Summer rallies historically occur during July and mid-August. However, that should not be taken as a reason to become overconfident. August has seen its fair share of heightened volatility.
Part of the reason is because August vacations reduce the number of active market participants or traders which leads to a market that is more susceptible to short-term disruptions.
Another reason is because many short-term traders try to time the market seasons and seasonal research suggests that the September/October time period has historically been weak.
For investors, trying to time these short-term swings in the market are simply not worth it. Swings in the market are normal and once an investor accepts that, the easier it is to maintain a disciplined long- term approach.
Interest Rates – How Long Will They Stay So Low?
The low level of interest rates look like they are here to stay for some time. The US government issues Treasury bills, notes, and bonds to help fund government spending. Investors buy these bonds and in return receive interest payments.
Treasuries are considered the highest quality bonds in the world because they are backed by the full faith and credit of the United States.
While they are still the highest quality bonds in the world, investors are receiving very little in interest payments. Treasury rates are the main rate that professional investors evaluate to determine the relative value of all other assets.
Right now, all treasury interest rates out to 10 years are yielding well below 1%! This low level of interest rates is helping the US government fund spending, but limiting conservative investors forward returns.
The Economy Needs Time To Recover
While the stock market has enjoyed a summer rally, the economy is slowly moving in the right direction. The recovery from Covid-19 related disruptions will be a process of starts and stops.
While the stock market rally fueled hopes for a V-shaped recovery, our base case remains a U-shaped recovery. The economy will take more time to recover than a V-shaped recovery would imply.
Historical studies of dislocations in the jobs market show that it takes a long time for jobs to recover to previous levels.
Government stimulus efforts will not cure a health care crisis, but the stimulus efforts are trying to stabilize conditions and give the economy time to recover.
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