Daily Capital

Weekly Market Digest: How Long Will the Low Interest Rate Environment Last?

The S&P 500 index extended its winning streak to 6 days in a row this week marking the largest weekly gain in about two months. Improving economic data, positive developments in the fight against the coronavirus, and renewed investor confidence in loose monetary policy drove stocks higher. The major focus for investors this week was the highly anticipated speech on inflation from Fed Chairman Jerome Powell. Powell unveiled a new approach to inflation that would allow inflation to run above 2% to make up for periods of lower inflation.

Weekly Returns

S&P 500: 3,508 (+3.26%)
FTSE All-World ex-US (VEU): (+2.11%)
US 10 Year Treasury Yield: 0.74 (+0.10)
Gold: $1,965.70 (+1.28%)
EUR/USD: 1.1906 (+0.94%)

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Major Events

  • Monday – The S&P 500 rallied to new highs on the news that the FDA authorized use of convalescent plasma for treatment of serious coronavirus cases.
  • Tuesday – Raytheon Technologies, Pfizer, and Exxon Mobil will be exiting the Dow Jones Industrial Average and will be replaced by Amgen, Honeywell International, and Salesforce.com.
  • Wednesday – Shares of Salesforce.com were up 26% after posting a record quarter and raising its guidance.
  • Thursday – Fed Chairman Jerome Powell’s speech at the annual Jackson Hole Economic Policy Symposium was embraced by investors as stocks rallied and the yield curve steepened.
  • Friday – Japanese stocks fell after Shinzo Abe, Japan’s longest serving prime minister, resigned for health reasons.

Our Take

This new strategy to let inflation and employment run higher after years of stubbornly low inflation, essentially reaffirms expectations that the current low interest rate environment will continue for the foreseeable future. The major difference from prior policy moves is that the central bank will have more flexibility to let the economy run hotter after periods of weakness by allowing for pricing to overshoot and by also adjusting what it considered full employment to reach more workers. This comes after extensive policy review and acknowledgement by the Fed that the economy has not come close to the 2% inflation target set back in 2012.

Powell specifically addressed that their new goal for maximum employment is to build a stronger labor force that would extend to lower income communities, which have been more severely impacted during the pandemic. The view that low unemployment risks inflation running out of control has shifted to being much less of a concern for policy makers.

The other important factor identified as a long-term risk was financial stability. Language was added to the strategy document acknowledging that financial stability is needed to achieve their goals and signals continued support for financial markets.

The Fed’s commitment to loosen monetary policy during a fragile and unpredictable economic recovery has been a major driver of the rebound in the stock market. This new strategy has sparked both optimism and skepticism though on whether it can work. The biggest question that remains though is how they will do this. September’s meeting should provide more details on how this new strategy will be implemented into policy.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Lacey Cobb serves as the Director of Advice Solutions at Personal Capital. She has 10 years of financial industry experience, with a background in portfolio management, trading, research, investment analysis, and financial planning. Prior to Personal Capital, she was the Head of Trading and Research at Polaris Greystone Financial Group, where she managed the portfolio management team and served on the investment committee. She started there as a financial planner and helped grow AUM from $250 million to $1.5 billion. Before that, she worked for State Street as a fund accountant. Lacey graduated from the University of California, Davis, and holds both the Chartered Financial Analyst® designation and Certified Financial Planner™ designation.

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