Markets moving higher. US markets opened higher, looking for a seventh consecutive higher close. Continued positive trends in COVID-19 progress helped, but the Federal Reserve’s (Fed) change in its views on inflation (more below) has many investors talking. Asian markets were mixed with Hong Kong and China solidly higher, while Japan sold off after Prime Minister Shinzo Abe announced he would step down. European markets posted mixed results during midday trading.
The Fed has spoken on inflation. Federal Reserve Bank Chair Jerome Powell announced a major policy change of “average inflation targeting.” Simply put, this means the Fed will be more likely to let inflation now run moderately above the Fed’s target of 2% before it considers hiking rates, thus allowing lower rates for longer, even as inflation creeps up. The hope is the new approach will allow for raising inflation expectations and allow inflation to float higher as rates stay low. Although Powell didn’t say exactly how much inflation he wanted, Dallas Fed President Robert Kaplan said later in the day on CNBC he would be good with a range of 2.25%–2.5%. Additionally, the Fed tweaked its views on employment, focusing on the lower end of the income spectrum, as it has now moved away from its long-held stance that a robust jobs market by itself causes inflation. The news was delivered at the Fed’s annual Jackson Hole, Wyoming, symposium. The “lower for longer” theme is one that was expected, but it is worth noting there were no updates on yield curve control or quantitative easing (QE), which may come in September at the next Fed meeting.
More new highs and an amazing August. The S&P 500 Index closed at a new all-time high for the fifth consecutive day Thursday, the longest such streak since six in a row in January 2018. With two trading days to go, the S&P 500 is up 6.5% in August, which would be the best August since 1986. Additionally, 15 days this month have closed green, the most for any month this year and the most for any August since 2003. Finally, this is the first August in history to have two separate six-day win streaks.
Happy birthday Uncle Warren! Warren Buffet turns 90 this Sunday. The investment icon has so many great quotes it’s hard to pick our favorite, but we’ll try. We’ll share some of our favorite Buffett quotes later today on the LPL Research blog.
Technical update. Value sectors outperformed Thursday as bond yields surged, particularly at longer maturities. Financials led all S&P 500 sectors as the yield curve, measured by the spread between the 10- and 2-year Treasury bonds, steepened to its highest level since early June. Stocks continue to outperform bonds, hitting fresh relative highs yesterday—an important risk barometer for the market. Meanwhile, defensive sectors such as utilities and staples are making year-to-date relative lows, signaling risk appetite remains healthy.
COVID-19 news. New daily cases inched higher Thursday to just over 44,000, but more importantly, hospitalizations fell 17% week over week (source: COVID Tracking Project). Reports from Washington, DC, indicate that Republicans and Democrats may still be as much as $1 trillion apart in stimulus talks, with state and local aid and unemployment benefits the primary sticking points.
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