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While concerns remain, the market is squarely focused on getting to the other side of the pandemic and the continued reopening of the economy.

September 01, 2020

Highlights

  • Investors and traders have become ultrasensitive to guidance from the Federal Reserve.
  • Markets in August made new highs, knowing the Fed would do whatever it takes to keep markets liquid, stable and functioning.
  • The market is entering the weakest part of the calendar for stocks, and the upcoming election could amplify market jitters.

Driving has certainly become easier lately, what with the GPS guiding our every move, every turn, and alerting us to each and every problem ahead. And to make driving more interesting, there’s even an impressive array of GPS voice accents to accommodate our every mood. But what happens when hurricanes, not to mention fires, strike with their arbitrary onslaught of destruction? All of this forces quick thinking, and a focus on staying calm above all else.

With the extraordinary recovery in the market since the March 23 low, thanks primarily to the massive liquidity supplied by the Federal Reserve, investors and traders alike, coupled with the speed of algorithms, have become completely ultrasensitive to guidance from the Fed. When the release of the last Fed minutes didn’t provide specifically and exactly what markets wanted to hear, that is, low rates for even longer, a rare post-March 23 sell-off ensued.

And just as life comes back to normal, with the GPS voice back ensuring every inch of our journey, markets in August were able to make new highs, knowing that the Fed would do whatever it takes to keep markets liquid, stable and functioning. Apple became the first U.S. company to reach a $2 trillion market capitalization, housing market high frequency data powered higher, and COVID-19 cases in the U.S. are finally leveling off. And the Fed, in a highly telegraphed move, formalized a new policy framework in which it will move to “average inflation targeting,” allowing inflation to climb higher than the long-held goal of 2% before considering raising rates. Moreover, announcements regarding developments toward a vaccine appear to be gaining traction for late 2020 approval with mid-to-late 2021 broad-based distribution.

The market is entering the weakest part of the calendar for stocks, and the upcoming election could amplify market jitters. More positive vaccine-related news should help. The Federal Reserve, too, has given a nod to a “risk on” market with its ultra-accommodative “lower for longer” policy, as it stays focused on healing the economy. But with a market making new highs on a now regular basis, the options markets only seeing more upside, and short interest falling, it suggests too much complacency. Concerns over the “fiscal cliff” haven’t vanished, and while hopes fade that the Democrats and Republicans can negotiate an appropriate deal, both sides do continue to talk. A deal would certainly help the market. Geopolitical issues also hover over the market and remain a cause for concern. But given that the market is overbought and extended, we may experience a necessary consolidation without any alarming headline spurring it.

Read Quincy Krosby’s full September 2020 market commentary, “The Road Ahead"  PDF (624 KB).

References include the following: Associated Press, Barron’s, Bespoke Investment Group, Bloomberg, Capital Economics, CBS News, CNBC, CNN, Cornerstone Macro Research, The Daily Dirtnap, Evercore ISI, The Economist, The Financial Times, Goldman Sachs, Market Watch, Morgan Stanley, The New York Times, Oxford Economics, Politico, Real Money, Renaissance Macro Research, Reuters, The Street, and The Wall Street Journal.

The views and opinions are those of the author at the time of publication and are subject to change at any time due to market or economic conditions. This document has been prepared solely for informational purposes. This is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The Prudential Insurance Company of America, Newark, NJ, and its affiliates. Prudential and its distributors and representatives do not provide tax, accounting, or legal advice. Please consult your own attorney or accountant. In providing these materials, the issuing companies and distributor listed above are not acting as your fiduciary as defined by any applicable laws and regulations.

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Yue Jiang

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yue.jiang@prudential.com