The bumpy ride in equity markets continued this past week as U.S. equity indices broadly dipped lower for a third straight week of losses. The recent uptick in volatility has been chalked up to several factors including faltering tech heavyweight stocks, heightened political tensions, a continued stalemate on fiscal stimulus, and an uptick in coronavirus cases that have collectively weighed on investor sentiment following a strong market rally since March that has left most financial markets at high valuations. For the week, the S&P 500 and Nasdaq both slid a little more than -0.5% and have lost -5.3% and -7.7%, respectively, in the past three weeks while the Dow Jones has held up a bit better with a -3.3% return over the past three weeks after staying flat last week. Cyclical sectors like energy, industrials, and materials actually eked out positive gains overall last week, though they’ve given back some of those gains in this week’s early trading in the face of stimulus uncertainty and resurgent coronavirus case counts. These sectors are very responsive to the outlook for the economic recovery.

 

Escalating political tensions are feeding into market volatility following the passing of Supreme Court Justice Ruth Bader Ginsburg over the weekend. President Trump stated that he will provide his nomination to fill the Supreme Court vacancy later this week and may push for a vote ahead of the November 3rd election, despite opposition from Congressional Democrats who are seeking for the vacancy to be filled after the election. The president indicated plans to nominate a woman and has 5 potential candidates under consideration. The contentious process for appointing the next Supreme Court justice is seen as making a deal on the fifth coronavirus relief package increasingly unlikely, putting a dent in market sentiment that had broadly baked in expectations for continued stimulus support. Bloomberg Economics forecasts that a lapse in unemployment benefits and small business aid may shave off over 5 percentage points from U.S. economic growth in the fourth quarter.

 

In addition to concerns of faltering fiscal support, many market participants have noted worries that the Federal Reserve is limited in its available resources to provide additional monetary policy support going forward with rates just above zero and credit markets functioning as they should. At last week’s monthly Federal Reserve Open Market Committee (FOMC) meeting, the central bank pledged to maintain its current pace of purchasing Treasury bonds and government agency mortgage-backed securities and indicated that rate hikes would likely be on hold for at least the next three years as they expect inflation to remain tame for at least that long. 

 

Meanwhile, the economic data continued to show a positive, yet moderating pace of growth last week as retail sales grew 0.6% month-over-month in August and July’s numbers were revised down to 0.9% from the initial report of 1.2%. Retail sales activity has recovered nicely to pre-pandemic levels (though that recovery is uneven with e-commerce a large beneficiary), but investors will continue to watch consumption closely as personal income is expected to dip as fiscal stimulus fades.

 

The week ahead will be relatively in light in terms of new economic data, so most of the attention will remain on the political landscape, particularly on the Supreme Court nomination and the ability of Congress to reach a stopgap spending deal to avoid a government shutdown at the end of this month. In addition to the policy implications from this election season, our First Merchants investment team will be closely monitoring the ability of economic and corporate earnings data to maintain their resilience in the weeks and months ahead as the stimulus measures that have replaced lost income for citizens and businesses taper off. We will keep you apprised of our thoughts and the implications for investment portfolios.