U.S. equities continued their upward momentum this past week amid improving economic data and Jerome Powell’s Jackson Hole speech in which he signaled an era of looser monetary policy with rates kept low for an extended period to allow time for the economy and labor market to heal in the wake of the pandemic. Meanwhile, the head of the FDA, Stephen Hahn, announced that the agency is prepared to fast-track approval of a coronavirus vaccine before completion of phase 3 clinical trials as confirmed cases in the U.S. surpassed six million. For the week, the S&P 500 surged 3.3% while the Dow Jones and Nasdaq Composite also enjoyed strong gains of 2.6% and 3.4%, respectively. The technology sector continued to be one of the leading gainers in the S&P 500 but most sectors logged solid returns, including the financial sector, which gained almost 4.4% as the yield curve steepened in response to the Federal Reserve’s plans to hold off on rate hikes for the foreseeable future and allow inflation to run hotter.
Although the recent leg up in equity markets has continued to be supported by the usual suspects of central bank liquidity, low interest rates, optimism toward a Covid-19 vaccine, and resilient economic and corporate earnings data, the weakening U.S. dollar against foreign currencies has also been cited as an increasing tailwind to U.S. stocks of late. The U.S. Dollar Index, which compares the U.S. dollar against a basket of foreign currencies, has fallen over -10% since hitting a peak in late March. The depreciating dollar not only provides a boost to earnings per share as profits earned overseas are translated back at higher rates but it also attracts foreign investors to U.S. stocks given a cheaper exchange rate. According to Goldman Sachs, foreign investors are forecasted to invest $300 billion in U.S. stocks this year, potentially making them the biggest net buyer in the market.
Last week’s economic data on the health of the U.S. consumer continued to show modest improvement as personal consumption expenditures grew 1.9% in July over the prior month (though it was down -2.8% from July of 2019) and the University of Michigan consumer sentiment index ticked up to 74.1 in August from 72.5 in July. However, the sentiment report did note increasing concern about households’ future economic prospects that could curtail spending growth in the coming months as job losses remain elevated and fiscal stimulus wanes.
House Democrats and Senate Republicans remain at an impasse on a fifth relief package but have edged closer toward a compromise. Democrats have noted willingness to come down to $2.2 trillion in stimulus versus their initial proposal of $3.5 trillion and Republicans are willing to increase to $1.3 trillion from earlier proposals of $1.0 trillion. There is increasing expectation that a deal will be reached as part of the next stopgap funding resolution to prevent a government shutdown on October 1st.
In the week ahead, the biggest economic news is due out on Friday, with the release of the monthly U.S. jobs report. Economists expect that the U.S. economy added 1.4 million jobs in August, and that the unemployment rate dropped below 10%. Both would be big improvements, but far from restoring all the jobs lost during the pandemic. Similar trends are playing out in the European Union, which releases its latest jobs numbers on Tuesday, and in Canada, which reports on Friday. Meanwhile, in a series of speeches, Fed officials will explain the implications of the central bank’s announcement last week that it will tolerate higher inflation to foster a stronger labor market.
