U.S. equities logged a second consecutive week of losses for the first time since March as market participants continued to pull back from highflying tech stocks that had fueled much of this year’s broad market gains. For the week, the S&P 500 and Nasdaq Composite tumbled -2.5% and -4.1%, respectively, while the Dow Jones held up a bit better with a -1.7% loss due to its lower tech exposure, though it still trails the other two indices by a wide margin this year. Energy markets also took a hit as U.S. crude oil prices dipped nearly -6.0% on the week amid a stalling recovery in demand. Some investors took shelter in safe-haven assets like government bonds with the U.S. 10-year Treasury yield dropping to 0.67% from 0.72% in the week prior.

 

Aside from stubbornly high weekly unemployment claims, August’s initial economic readings continue to surprise to the upside, even with the expiration of much of stimulus relief benefits at the end of July. Last week’s inflation report showed the Consumer Price Index rising 1.3% year-over-year driven by strength in used cars, apparel, and recreation. The inflation reading was the latest data to confirm the continued V-shaped recovery in economic output to date, which has supported investor sentiment and the market rally. However, few economists anticipate that the recovery will be able to maintain that pace as fiscal stimulus fades and the low hanging fruit of the recovery has already occurred with further progress in industries like travel, restaurants, energy, and brick-and-mortar retail more difficult to come by until there is a vaccine.

 

Despite the strength of the economic rebound, the Federal Reserve has maintained a high degree of caution on the outlook and its members continue to press Congress to come to an accord on extending stimulus relief, primarily driven by the difficult employment picture. Continuing jobless claims ticked up last week to 13.4 million from 13.3 million in the week prior, and a rising percentage of temporary job losses are becoming permanent. Market participants will closely follow Fed Chairman Jerome Powell’s commentary coming out of the monthly Federal Open Market Committee (FOMC) meeting this week, but there is not much expectation in terms of policy action. Although the Fed has noted its concerns on the stability of the recovery, the central bank is limited in its remaining available policy responses that will do much to further stimulate the economy as interest rates remain on the floor. 

 

In addition to the central bank meeting this week, investors will also get an update on U.S. consumer strength through the August retail spending report, which is expected to show a 1.1% increase over July’s retail spending, and the preliminary consumer sentiment report from the University of Michigan. These indicators will start to provide an indication on whether the drop off in fiscal stimulus is impacting domestic consumption, a key driver for the U.S. economy.