Market Currents

• End of Q3. Despite a pickup in volatility and negative results in September, a strong July, and the best August performance in over three decades helped push most indices into positive territory on the full quarter.  For the year, the S&P 500 is up nearly 6% as of September 30, a remarkable

• Corporate Profits. With the second quarter earnings season near its conclusion, corporate profits have proved to be more resilient than feared.  Despite logging the largest year-over-year decline since the first quarter of 2009, investors were largely comforted by the number and magnitude of upside surprises, and the generally encouraging levels of future guidance.

• Economic Activity Improving. Despite the unevenness of the reopenings across the different states, economic activity in general has been picking up.  The labor market continues to recover faster than most economists’ expectations.  Manufacturing signals remained encouraging, and housing trends continued to hold surprisingly firm through the crisis.

• Public Health Improves. We saw continued progress in slowing the speed of the virus in August.  In the U.S., the number of new daily cases has been decreasing since late July.  However, some regions – including Europe – may be facing a second wave.  The densely-populated India is now the latest hotspot, a grim reminder that COVID will be around for longer.  So far, better testing and tracing capabilities have allowed policymakers to treat the pandemic with targeted measures instead of a broad nationwide lockdown.

• Lower for Longer. Federal Reserve Chairman Jerome Powell unveiled a new monetary policy strategy that they will allow higher inflation and welcome strong labor markets.  In its new language, the central bank now aims for a 2% inflation on average.  With the current subdued rate of inflation, the implication is that they will allow inflation to run hotter in the near-term.  The Fed also removed its bias against strong labor markets, disassociating its previous presumption that strong labor markets lead to out-of-control price increases.

• Outlook. The reopening of the economy, surging liquidity and hopeful virus treatment/vaccine news have been significant tailwinds behind stocks.  The economy and corporate earnings are generally coming in better than expected, and are showing encouraging signs of recovery.  We maintain a watchful eye on new infection trends, and how they may affect the pace of activity restart.  In particular, school openings remain a volatile unknown.  The Presidential race remains a toss-up at this point.  As the election season heats up, we will continue to monitor the potential market impact from possible changes to the balance of power in Washington.