Morning Jog

September Sun

Seasonally, September is a weak month for the equity market, so it is somewhat reassuring, if only for the sense of “normalcy” it brings in an otherwise abnormal year, that this September is proving to be just that. What began as a selloff in big tech stocks earlier in the month, extended to the broader market and pushed the S&P into official correction territory of a 10% decline from recent highs.

COVID and politics are front and center.

The resurging wave of coronavirus cases in Europe and growing numbers in the US, bring with them the potential for renewed lockdowns and consumer retrenchment. Although this time around governments are determined to avoid the kind of large-scale lockdowns instituted in the spring, we are seeing targeted restrictions in Europe already taking a toll on the services sector.

In the US, latest services and manufacturing activity numbers still point to a continuing recovery, as retail sales and jobless claims data indicate that the pace of the recovery is losing some steam.

New weekly filings for unemployment benefits are stubbornly holding steady, and as the $600 (replaced by $300) weekly supplemental unemployment benefits are tapering off, the pace of retail sales growth is starting to slip.

The boost to consumers from one-time stimulus checks and the extra unemployment benefits channeled funds into the economy at a crucial time, but as the CARES act programs are sunsetting when employment and small business recovery is reaching a plateau, the need for additional stimulus is more acute.

The timeline for additional fiscal stimulus has been pushed back with the death of Justice Ginsburg, as the Senate is now singularly focused on filling the Supreme Court vacancy before the election. Meanwhile, the latest proposal for a $2.4 trillion spending package being readied by House Democrats is an exercise in futility given how far apart they are with what the White House and the Senate will consider.

The need for additional fiscal support was hammered home by Fed Chair Powell and echoed by a chorus of Regional Fed chiefs, during his three-day Congressional testimony this week. By moving to a zero-rate interest rate policy and unleashing a torrent of emergency lending facilities, the Fed stabilized financial markets and eased access to capital for larger businesses and municipalities.  But while large corporate borrowers have no trouble tapping the credit markets, smaller businesses have fewer tools at their disposal, particularly with the expiration of the Paycheck Protection Program in early August.  Powell urged policymakers to be more targeted in the next stimulus bill, prioritizing small businesses and direct benefits to the unemployed.

While Central Bank action has undoubtedly been a boon for investment portfolios this year, the unintended consequences of a zero-rate policy are being felt across portfolios in this recent market correction.  Traditionally bonds have provided a counterweight to equities in periods of market stress, however when yields are already as low as they are, there is not much more room for them to fall (and bond prices to rise), as the stock market declines. Treasury bonds barely budged this month, as the equity markets continued to slide.

This interest rate environment brings new challenges to management of traditional stock/bond portfolios and will require a new perspective on risk and diversification, something we are laser-focused on for our clients as we navigate this new paradigm.

Enjoy your weekend.