Welcome to the waning days of September already. The much-anticipated presidential debate is scheduled for Tuesday night, as the presidential election and all the politics surrounding it are taking center stage on the news. If we’re already tired of the political ads and propaganda now, imagine how we will feel over the next five weeks!
With regard to the markets, we had another dismal showing last week, as the Dow (-1.7%) and S&P 500 (-0.6%) were down for the fourth straight week for the first time since August 2019. The NASDAQ (+1.1%) was able to manage a small gain, thanks to a strong showing at the end of the week. Wednesday of last week proved to be the biggest decliner, as all three indices were down over 3%. At that point last week, the three indices had fallen over 7% since their recent highs in August, whereby a 10% drop is considered a correction. We did rally nicely at the end of last week, though, and appear to be off to a very strong start today. Bonds also were down last week, as taxable bonds were down about 0.5%, and tax-free muni bonds were flat to down marginally.
At this point, we shouldn’t read too much into the recent decline in the markets. Volatility associated with political uncertainty can be expected, and stock valuations were arguably getting ahead of themselves. Further, the markets have reacted negatively to Fed comments that they would be keeping interest rates near zero for the coming 1 – 3 years. This can be viewed favorably or unfavorably. From an economic standpoint, low interest rates are very good for corporations and help support higher PE ratios. Conversely, when the Fed makes that statement, it exudes their concern over the strength of the economy for an extended period of time. Me? I believe the rates will stay low until the Fed comes up with a reason to raise them again, regardless of the time period. In short, it’s more noise that creates additional volatility. The economy, while not very strong yet due to the pandemic, is continuing to recover, but at a rate slower than a few months ago after the shutdowns were ended. In conclusion, it’s very hard to separate the headlines from the fundamentals, so just try to stay calm for the next several weeks until this election is behind us. Meanwhile, we continue to watch the fundamentals behind the scenes.