The Week on Wall Street
Stocks advanced last week, propelled by hopes that legislators may reach an agreement for a new fiscal stimulus package and optimism generated by a few corporate deal announcements and initial public offerings.
FACT OF THE WEEK
The 1921 World Series between the New York Giants and the New York Yankees on October 5 was the first to be broadcast. Neither announcer at the ballpark recreated the game from the information they received off a telegraph wire. Nevertheless, many fans who "watched" the first game of the 1919 World Series missed none of the excitement and thrills experienced by the fans at the ballpark, due to listeners recalling that the announcers gave such descriptive accounts, they didn't need television. Today, some still see the charm in listening to a game, notably when a broadcaster, as the great Bob Murphy, was there every night "painting the word picture" every step of the way.
The Dow Jones Industrial Average rose 1.87%, while the S&P 500 increased by 1.52%. The Nasdaq Composite Index gained 1.48% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, advanced 1.56%.
The Quarter in Brief
The summer brought an economic rebound and a continuation of the stock market rally that began in spring. In late September, the Federal Reserve Bank of Atlanta's GDPNow tracker estimated real Gross Domestic Product (GDP) growth of 32.0% for the third quarter.
All three of the major Wall Street benchmarks advanced in Q3; the S&P added nearly 8%, ending the quarter up about 4% for the year. Even so, U.S. equities slumped in September as traders worried that the stock market might be getting ahead of the economy. In Washington, the Federal Reserve altered its monetary policy stance and forecast low-interest rates for the near future. Hopes for another economic stimulus dimmed in Congress.
On Main Street, the coronavirus pandemic remained top of mind, but improvements in hiring, consumer confidence, and retail sales were evident. Entering the fourth quarter, analysts wondered how adroitly the financial markets might manage some unknowns:
- a potential uptick in COVID-19 cases in the fall
- the pace of vaccine development
- the outcome of the presidential election undetermined prospects for additional economic support of businesses and households
The U.S. Economy
Many positive signals appeared in the quarter. Millions of Americans went to work again; monthly net job growth topped 1.7 million in July and 1.3 million a month later. Unemployment hit 14.7% in April, fell from 10.2% in July to 8.4% in August, and the U-6 rate counting both underemployed and unemployed Americans declined from 16.5% to 14.2%. As measured by the Conference Board's monthly index, consumer confidence leaped to 101.8 in August from 86.3 in July.
Households kept up their buying—retail sales were up year-over-year through August even though supplemental unemployment benefits expired at the end of July. Industries also grew, according to research from the Institute for Supply Management. When ISM's Monthly Purchasing Manager Index for the manufacturing and services sector surpasses 50, those sectors are judged by ISM to be expanding. ISM's services PMI was at 58.1 in July and 56.9 in August; its manufacturing index reached 54.2 in July (a month that saw a 6.4% rise in U.S. factory orders) and 56.0 in August.
Home sales soared as summer began, and although that momentum tailed off, sales did not retreat. Residential resales were up 24.7% in July, and another 2.4% in August. New home buying increased 4.8% for August after a 14.7% July climb. Housing starts and building permits were both up 17.9% in the first month of the quarter, but then they both declined; permits dipped 0.9% and started 5.1% in the eighth month of the year.
For more than a century, the Federal Reserve has had two primary monetary policy objectives: to manage inflation and to guide the economy toward a state of maximum employment. Historically, managing inflation has come first. So, it made news on August 27 when Fed Chairman Jerome Powell announced that the central bank would "seek to achieve inflation that averages 2 percent over time," rather than proactively adjust short-term interest rates when inflation approaches that established target. In other words, it would tolerate a little more inflation than it had in the past as a trade-off for spurring the economy.
The Fed kept the federal funds rate in the 0%-0.25% range in the quarter, and its September consensus interest rate forecast showed it expected no change for short-term interest rates through 2022.
The Global Economy
As economies worldwide continued to labor under the coronavirus pandemic, the International Monetary Fund (IMF) and Organization for Economic Cooperation and Development (OECD) revised their global economic activity estimates for 2020 and 2021.
The IMF sees a 3.0% contraction for global GDP this year, with the global economy growing 5.8% next year. The OECD estimates a 4.5% pullback for global GDP in 2020, and then a 5.0% rebound in 2021.
The quarter ended with no agreement yet on a post-Brexit trade deal between the United Kingdom and the European Union, as the post-Brexit transition period ends December 31.
Complicating matters, U.K. lawmakers introduced a bill that would disregard conditions for trade with Northern Ireland established as part of Brexit, which the E.U. has hotly protested. U.K. Prime Minister Boris Johnson wants both parties to reach a free trade agreement this month; Johnson aims for a pact without quotas or tariffs attached, similar to the arrangement the U.K. has with Canada.
Foreign stock exchanges saw some significant quarterly gains stand out. South Korea's Kospi rose 11.2% in three months; no other consequential overseas benchmark advanced double digits in Q3. China's Shanghai Composite added 7.82%, Taiwan's TWII 7.70%, Argentina's Merval 4.69%, Japan's Nikkei 225 4.02%, and Germany's DAX 3.65%.
On the other side of the ledger, Hong Kong's Hang Seng retreated 3.96%, and Spain's IBEX 35 dipped 7.12%. MSCI's EAFE index, which tracks large companies across developed countries in Europe and Asia, rose 4.90% in Q3.
Looking Back, Looking Forward
July and August saw stocks power through entering historic territory in mid-summer. In particular, August saw a powerful rally. The Nasdaq climbed 9.59% in August, and the Dow gained 7.57%, finishing with its best August since 1984. Advancing 7.01% to cap a 5-month winning streak, the S&P had its best August since 1986. September got off to a good start, with a new record close for the S&P: 3,580.84.
Then, reservations about the rally surfaced. Traders began to question the sustainability of the summer economic recovery, and whether a fall uptick in infections might hurt business and consumer spending. The S&P ended September at 3,363.00, retreating 3.92% for the month. The Dow lost 2.28% in September to fall to 27,781.70, and the Nasdaq gave up 5.16%, declining to 11,167.51.
The 10-year Treasury yield spent all of Q3 between 0.52% and 0.74%, reaching the top of that range in late August. Wall Street enters the fourth quarter with a bit of uncertainty. The November election results may produce any number of reactions. The first reading on 3rd-quarter Gross Domestic Product growth is on October 27, roughly one week before election day.
Federal Reserve officials expect low interest rates and very little inflation through 2022. Sustained low interest rates could drive more borrowing and business investment and improve the outlook for the housing market.
FINANCIAL STRATEGY OF THE WEEK
Expectations vs. Reality
Seeking to create an exact blueprint of your retirement future is comparable to a meteorologist forecasting the weather correctly every time. Few retirees find their financial futures playing out precisely as they assumed. Understanding some of the more common assumptions about retirement may help you get closer to your goal than most.
Do retirees actually "outlive" their money?
As past generations retired, people lived in dire straits, sometimes "down to their last dime," which led to the creation of Social Security. Social Security is still a conventional supplement to one's retirement strategy to help retirees that have become impoverished by health crises. Working with a financial professional may help you prepare for this hard-to-anticipate cost.
Retiring on 70-80% of your end salary may not be feasible.
Recent findings from various guidelines issued for new retirees to strive to retire on 70-80% of their end salary can be tough to achieve. Most new retirees often want to travel, explore new pursuits, learn some hobbies, and finally get around to those things they put off when they were too busy with work. In the first few years, some may spend roughly as much as they did before retirement.
For many retirees, median household spending increases on the way to a retirement transition. With a smart financial strategy, the annual median household spending in retirement tends to decline gradually after age 60 and begins to plateau when people reach their early eighties.
Practice makes perfect, even in retirement.
On average, households headed by those older than 65 spend 25% less annually than younger households (a difference of more than $15,000). While health care spending increases in retirement, other household costs decline, particularly transportation and housing expenses.
Retirement may arrive earlier than expected.
Most individuals retire closer to age 60 than age 70. Today, the average retirement age in this country is 61, which means you could potentially claim Social Security earlier than planned if only to avert drawing down your retirement savings too quickly.
Living the life you want.
A recent survey found that 47% of American retirees feel that their time before retirement allowed them to enjoy the same standard of living they had while working.
Remain flexible in retirement.
Your retirement may differ slightly, or even significantly, from the retirement you have imagined. Fortunately, it may be possible to create a flexible retirement strategy with a financial professional's help. It's never too late to start!
As always, please contact my office with any questions or financial concerns you may have.