September has brought about a correction amidst the stock market recovery that began this spring.
After briefly reaching new highs in the beginning of September, markets have trended lower for most of September. Historical volatility is not unusual in September, but this is 2020.
There is encouraging signs in the data. While markets have trended lower, they have done so without the panic of February and March. This has been a very orderly correction. We can look at the catalysts for them and they give us an indication of what is most likely to influence a resumption in the upward trend.
The Fed announced in their September meeting that they planned to keep interest rates low for the foreseeable future. This was expected however, during his press conference, Chairman Powell spooked markets by appearing to some as though he thought that the Fed might not be able to influence markets as much as they have historically. He quickly attempted to clarify, but markets already were reacting. The view is that fiscal policy, currently, is more effective than monetary policy. Simply put, we need Congress and the President to agree on additional fiscal stimulus.
The Fed is resolute in perusing maximum employment and until we begin to see that improving, we are likely to not see markets being affected by economic data. Without that, the Fed’s ability to goose the markets is tentative.
Data will influence earnings, sector performance and yield curves, and Modern Monetary Theory (MMT) came into play during this spring with enhanced unemployment benefits and direct payments to families, individuals, and backstopped businesses. One of the principals of MMT is that monetary policy becomes subservient to fiscal policy. This is not the first time this has happened. It briefly happened after WWII. Additionally, with the Fed promising to hold rates near zero for the long term, there will be less focus on what the Fed is doing. Here is a chart showing the It is very unusual to have such clear forward guidance that indicates no rate hikes until 2023 or beyond.
MMT ideas drive fiscal policy to the forefront because it can give immediate relief to financial stress. The fiscal policy that is anticipated is likely the reason the market has struggled in September. As Congress has struggled to agree on a deal package, economic activity has also slowed.
There has been talk of the two sides of the aisle coming together and getting a deal done, after making the public wait months for a next fiscal stimulus. It will likely be between $2-$3Trillion more which will help give the economy more time to recover. Unfortunately, it is hard to know when exactly it might get done. There are a number of unemployed people that need some help, especially as much of the country and world remain under some level of lockdown and are affected by the COVID pandemic.
Considering all the data, the September stock market correction does not yet appear to be extraordinary and should be viewed as a correction within a longer bull market at this point. This is 2020 though, so things could develop quickly! Remaining vigilant is imperative in these times. Certainly, the election will undoubtedly also come into play over the next Month or two (depending on how fast we know election results).
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