Plimoth Investment Advisors Logo Market Update from PIA  |  SEPTEMBER 2020

Markets Begin to Send Glimmers of Hope

2020 has been a bumpy ride for the economy and stock market; yet many positive indicators are showing that recovery is underway and poised to continue on this path.

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Feeling the Market’s Highs and Lows? Welcome to Bungee Investing.

No matter how many years, or decades, you have been investing, the opportunities to learn new terms in our dynamic business seem to continue to come around periodically. Bungee investing is a form of speculative momentum investing in which novice retail investors “take the plunge” into the stock market riding the fast-paced waves of rapid moves in stock prices, oftentimes focusing far less on potential risk than reward.

Today, while more of a colloquial media reference than an actual term, “bungee investing” seems apropos when framing the feel of the current environment. After U.S. equities declined more than any other point in history in a short five-week period, they have sprung back in record time.

Bolstered by a rise in popularity of commission-free trading accounts, retail investors have piled into the stock market in record numbers, driving trading volumes, and prices, of certain favorites ($1,000 for a $1 of Tesla earnings anyone?) at a rapid pace. While commission costs in these accounts may be zero, the cost to those participating in speculative trading with little to no fundamental research may be much higher in the long run.

Market Index Returns Aug 2020 YTD 2020
S&P 500 Index 7.2% 9.7%
Russell 2000 Index 5.6% -5.5%
MSCI EAFE Index 5.1% -4.6%
Barclays US Agg. Bond Index -0.8% 6.9%
FTSE 3 Mo. T-Bill Index 0.0% 0.6%

The S&P 500 Rallies Back

The S&P 500 staged a comeback to pre‑pandemic levels in record time, passing through the previous peak in only 126 trading days. This is ten times faster than historical recovery periods.

The broad U.S. equity index was up by over 7% in August and stands nearly 10% higher year‑to‑date. Highflying technology stocks continued to drive the market higher, while more cyclical market segments such as energy, financials, industrials and utilities remain in the red thus far in 2020. Investors continue to favor U.S. equities over other parts of the world.

S&P 500 Sector Returns Aug 2020 YTD 2020
Communcation Services 9.1% 16.1%
Consumer Discretionary 9.5% 28.0%
Consumer Staples 4.7% 5.7%
Energy -1.0% -39.3%
Financials 4.3% -17.3%
Healthcare 2.7% 7.3%
Industrials 8.6% -3.3%
Information Technology 12.0% 36.0%
Materials 4.4% 4.1%
Utilities -2.7% -6.7%

Interest Rates Expected to Remain Low

The Federal Reserve announced a major policy shift from inflation targeting to averaging, signaling a tolerance for inflation to rise above the 2% level that may have otherwise caused them to consider raising rates.

The move is another signpost along the “lower for longer” interest rate road most are expecting. Short‑term rates in the U.S. remain pinned near 0%, and going further out the yield curve will not earn those willing to lend capital at this time much more. The average of 30‑year fixed rate mortgages continues to hover near all‑time lows, supporting a housing market that stands as the primary economic bright spot.

A Strong Labor Market is Key to Our Economic Recovery

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The U.S. economy had entered recession, ending the longest economic expansion in history. Gross Domestic Product (GDP) pulled back by an astounding -32% in the second quarter on the back of pandemic‑related lockdowns.

The pace of recovery will be closely tied to the ability to safely reopen businesses. Developments in re‑openings across states are fluid and virus‑related data continues to be monitored extremely closely.

A revival of the labor market is the foundation that will be needed for a sustained economic recovery. Unemployment levels have shown signs of improvement, declining from historic double‑digit highs to 8.4%, but have ample room for improvement. Much has been discussed about the state of temporary furloughs relative to permanent job destruction. As shown in the chart below, the gap between layoffs expected to be temporary and permanent is closing, with the leisure and hospitality industries hit the hardest.

A Second Stimulus and the Presidential Election Will Influence the Market

The U.S. budget deficit tripled over the past year, to $2.8 trillion; a notable factor with debate in Washington over what an additional round of stimulus for Main Street and small businesses might look like. In conjunction with U.S. Presidential election campaigns heating up, the potential for political headlines to factor into market sentiment does as well.

We will continue to digest and synthesize the myriad of data and daily headlines to keep you apprised of factors we think will be most impactful to financial markets. To that end, we have transitioned from a quarterly newsletter to a more frequent and concise monthly format. We would be delighted to receive your feedback on the change or to hear how we can be more helpful to you with achieving your financial goals.