September 2020

The bond market was little changed in September as investors grappled with continued virus uncertainty and traders with school-aged children tried to figure out the logistics of educating their young.  The latter issue made for uneven liquidity during the month which may have factored into the performance of the stock market.  For the month, the S&P 500 was down -3.91% breaking the string of consecutive positive months that extend back to April.  The performance of the bond market for the month was lackluster with the 10-year Treasury Note falling 1.5 basis points for the month.   

The end of summer has done nothing to clarify the uncertainty surrounding future earnings, as the contentious Presidential contest drags on.  Current polling has Joe Biden leading President Trump, but such an outcome is not a certainty.  Should Biden be elected President, it’s not clear who he would appoint to his economic team.  Senator Elizabeth Warren and Fed Governor Lael Brainerd have been floated as the potential Treasury Secretary.  The former is viewed by the consensus as being decidedly anti-business, while the latter would be viewed as a more balanced policy maker.  The ultimate choice will be tasked with continuing to support the economy despite the enormous challenge the virus poses.

That challenge has driven the Federal Reserve to become dovish in a manner never before witnessed.  Chairman Powell has abandoned any hint of being apolitical, having jointly testified before Congress with Treasury Secretary Steve Mnuchin, with the message that the lawmakers need to approve additional stimulus to avoid a continued economic downturn.  Granted, given the outsized unemployment rate and a near closure of the travel, entertainment, and hospitality industries, supplemental stimulus is warranted.  But there is no mention of how much money has already been spent.  The Fed’s balance sheet has ballooned to over $6 trillion as they continue to buy Treasury notes and bonds in the secondary market, with no end in sight.  Moreover, the various Fed Governors along with the Chairman have pledged to continue to do so for the foreseeable future.  Long gone are the days when Alan Greenspan said “I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant.”  Back then, the Fed was staffed with monetary hard and soft liners that, by today’s standards, differed in policy thought in only a nuanced way.  Today, to the last one, members of the Fed are decidedly dovish and are not shy about vocally professing their panic over economic growth.

The excessive dovishness is reflected in the value of the U.S. Dollar which has been in a down trend since March.  That market, like the S&P 500 is being influenced by the Fed’s ultra-loose monetary policy.  From a fundamental perspective one would think that the dollar would maintain a stable value versus our major trading partners, especially given the worsening virus outbreak in Europe and the unresolved “Brexit” issue.  Also benefitting from the easy money policy is gold.  After correcting from its March low, gold has renewed its upward moment and looks likely to challenge the $2,075 high hit last summer.  Regardless of the outcome of the Presidential election, easy money is unlikely to end any time soon.

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