Stocks opened lower. The late-session selling after the Federal Reserve (Fed) announcement Wednesday is spilling over this morning. Markets got a dovish Fed but seemed to want more, which is dampening enthusiasm for traders. Global markets are broadly lower with losses in Europe in midday trading. Asian markets closed broadly lower, with particular weakness in Hong Kong.
Strong improvement in continuing jobless claims. Filings for initial jobless claims came in near expectations at 860,000 for the week ending September 12 (source: US Department of Labor), down 33,000 from the upwardly revised 893,000 the prior week. Better news came from continuing claims, which improved by more than 900,000 to 12.6 million, handily beating Bloomberg’s consensus forecast of 13 million., With claims currently above pre-pandemic record highs, the job recovery still has a ways to go, and it won’t get any easier as stimulus fades, but improving continuing claims reflects clear progress.
Fed upgrades economic views but still sees risks. New economic forecasts released Wednesday at the conclusion of the Fed’s two-day policy meeting saw a substantial upgrade in economic expectations. The median 2020 GDP forecast was lifted from -6.5% to -3.7%, although forecasts for 2021 and 2022 lost some ground. At the same time, the Fed continued to highlight ongoing downside risks from the pandemic. During his press conference, Fed Chair Jerome Powell emphasized the role of fiscal policy in maintaining the recovery as Congress remains at an impasse that may last into 2021.
Lower for even longer. Some of the impact of the Fed’s update to its policy framework, announced last month, appeared in the outcome of its latest policy meeting. Meeting participants’ median forecast of its first rate hike was pushed out a full year from its last set of forecasts to 2023 (the latest option available), despite improved economic forecasts. The median forecast for the longer run rate held at 2.5%, but it will be a while before we get there. In the last cycle the first hike didn’t take place until a full seven years after rates hit zero, and under the new guidance, the hike may have been delayed even further.
European stocks aren’t as cheap as they seem. At a forward price-to-earnings ratio (PE) near 18, the MSCI Europe Index valuation stands more than 40% above its 25-year average (source: FactSet). The MSCI EAFE Index’s 19% discount to the S&P 500 Index PE of 22 looks appealing, but much of that discount is being driven by Japan, which is trading at a 15% discount to its 25-year average. Fundamentals continue to favor the United States over Europe.
Talking markets around a campfire. This year at LPL Focus 2020, LPL Financial Chief Investment Officer Burt White and Chief Market Strategist Ryan Detrick discussed markets in a very socially distant way— around a camp fire! We’ll share the engaging video of Burt and Ryan as they discuss the year that has been, the year that will be, and more, later today on the LPL Research blog.
Technical update. Losses from the largest stocks pulled the S&P 500 down 0.5% Wednesday; however, selling was much more benign under the surface. The Russell 2000 finished with a 0.9% gain, and advancers outnumbered decliners on the NYSE by nearly 2:1. Markets are moving lower in early trading today, and the S&P 500 may once again test its 50-day moving average at 3336.
COVID-19 news. On Wednesday, new cases in the United States rose 29% week over week while the seven-day average remains 4.7% above the prior week’s level (source: COVID Tracking Project). However, hospitalizations declined 26% after weekly increases each day this week, an encouraging sign. Moderna expects to know by October if its vaccine works. Global COVID-19 cases likely will reach 30 million this week, while the death toll tragically nears one million.
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