Daily Capital

Weekly Market Digest: The Fed Votes to Keep Interest Rates Near Zero

Major U.S. stock indexes were down for the week with the tech sector weighing heavily on returns. Unloved areas of the market like international, small-cap and value stocks all held relatively better and were actually up for the week in what looks to be at least a short-term reversal in recent trends. It was an action-packed week filled with deal announcements, major IPOs, and guidance from the Federal Reserve. Focus has shifted to what is in store on the fiscal front as lawmakers aim to come to a deal Friday in order to avoid a government shutdown next month, but still remain at an impasse over the next round of coronavirus relief.

Weekly Returns:

S&P 500: 3,319 (-0.64%)
FTSE All-World ex-US (VEU): (+0.71%)
US 10 Year Treasury Yield: 0.7 (+0.03)
Gold: $1,958.25 (+0.92%)
EUR/USD: 1.1848 (+0.03%)

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Major Events

  • Monday – ByteDance, the Chinese tech company that owns TikTok, has chosen Oracle as its “trusted tech partner” to take over TikTok’s U.S. operations, but with few details on the deal logistics.
  • Monday – OPEC cut its forecasts for world oil demand by 400,000 barrels a day through 2021 citing elevated risks from Covid-19. It forecasts a drop in demand of 9.5 million barrels a day in 2020.
  • Tuesday – Major retails announced plans for a new shopping holiday 10.10, to take place October 10th and inspired by 11.11, which is November 11’s Singles’ Day, in China.
  • Wednesday – The Fed voted to keep short-term rates near zero.
  • Wednesday – In the largest software IPO in history, Snowflake (SNOW) began trading Wednesday at $245 per share more than doubling at the open.
  • Thursday – Initial jobless claims came in at 860,000 which was down from last week, but inline with expectations while continuing claims beat expectations.
  • Friday – Volatility picked up on Friday along with increased trading volumes from “quadruple witching” day, a quarterly event where options and futures on indexes and equities expire.

Our Take

The Fed concluded its two-date policy meeting this week with Federal Chairman Jerome Powell speaking on the latest rate decision and adjustments to the outlook for GDP, inflation, and unemployment. Most committee members expect rates to stay near zero through 2023. Powell provided more color on their new approach to allow inflation to run above the 2% target for some time in order to stimulate economic growth and reach full employment. The committee adjusted its near-term guidance upward and now sees a full-year GDP decline of 3.7%, compared to the prior forecast of a 6.5% drop, but did however lower their forecasts for 2021 and 2022 by 1% and 0.5% respectively.

The take-away message from Powell was that although the Fed has many tools left to support the economy, what is really needed now is fiscal support to keep the economy on stable footing. He reiterated that the Fed would continue to do its job which is to achieve maximum employment and stable prices, but “over the long run, we can’t really affect the growth rate of the United States. The potential growth rate of the United States is not a function of monetary policy.”

Powell made his view very clear that the private sector and fiscal policy are what drive the long-run growth rate through efforts that increase productivity, labor force participation and the enhancement of workers skills. As it stands right now, talks over another coronavirus aid package continue to stall in Washington as both sides fight over the dollar amount and allocation of funds. Failure to come to a deal on this soon would most likely derail the already fragile economic recovery. Market volatility is already likely to pickup as the election approaches, but additional uncertainty on the fiscal front would likely exacerbate things.

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, CFA, CFP®
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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