Monday Morning Wrap Up – September 14, 2020

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High-flying tech stocks fall fast.

Warning: volatility lies ahead!

Football is back, children are in school (or on Zoom classes), a chill is felt in the morning air and in some parts of the country the leaves are beginning to turn yellow, red and brown in Mother Nature’s stunning fall display.

Yet, despite this small sense of the new normal, the stock market cratered last week in a topsy-turvy week in which investors dumped high-flying tech stocks like Apple, Facebook and Amazon.

Indeed, the S&P 500 and the tech-heavy Nasdaq Composite fell 4.8% and 7.2% over the past two weeks.

Is this volatility a hint of what’s to come over the next six weeks?

You bet it is.

The classic herd mentality drove stocks higher in recent months.

Guess what?

The herd is changing direction.

Remember that big wave of new Millennial day traders who got into stock trading during the pandemic? They place orders on their phones, just like they would order takeout food. They are learning a hard lesson – the equity market goes down too.

There is an old Wall Street saying: Stocks take the stairs up and the elevator down. That is why they call them stock market crashes.

Markets nervous about election

As the U.S. presidential election edges closer, the polls are tightening between incumbent Donald Trump and challenger Joe Biden. All across the country, voting commissioners are already facing lawsuits about technicalities, mail-in voting postmark dates and other challenges to voting in the midst of the Covid-19 pandemic.

This will be the most hotly contested and highly partisan presidential election in decades.

And, financial markets are getting nervous.

Just look at last week’s market action. This is only the beginning. In the meantime, the traditional role of bonds in a portfolio continues to wane in today’s world of zero and negative interest rates.

The decreasing value of bonds

As the markets and economy head into a challenging period, investors around the globe are rethinking the traditional role of bonds in a diversified portfolio – that has been, in part, behind the historic rush into gold and silver in 2020.

In fact, the 10-year Treasury bond’s real yield, which includes inflation – now stands at -43 basis points.

In simple terms, yes, that does mean you lose money for every dollar you invest in a U.S. government bond. With inflation, you are losing nearly 50 cents on every dollar invested in a 10-year note.

No surprise that major investment firms are now calling gold a ‘bond alternative.’ Not only are investors able to hedge against inflation, but also capture precious metal price appreciation.

Speaking of inflation…

The inflation trend is rising

Have you noticed? Prices for the things you buy are going up.

The consumer price index rose 0.4% in August, the Labor Department reported last week. That comes after the CPI also advanced 0.6% in June and July.

Here’s what the experts are saying about inflation…

“This inflation outbreak will test the resolve of Fed officials who say they are not all concerned about inflation and will continue to pour gas on the fire with the QE of $80 billion monthly purchases of Treasury securities and they won’t rein in the economy with interest rate hikes,” Chris Rupkey warned last week. He is chief financial economist at MUFG, a global financial group.

“More recently there has been a lot more upward pressure on prices than we would have expected…With goods production continuing to lag behind the rebound in spending, those problems are only going to become more acute over the next few months, pushing core inflation higher,” according to Paul Ashworth, Chief North American Economist at Capital Economics.

Indeed, Jason Fertitta, head of registered investment advisor Americana Partners, said that in light of all the easy money central banks are pumping into the global economy, there is a case for investors to increase their exposure to real assets.  “My biggest concern is that the levers the Federal Reserve is having to pull to keep this market going is very experimental, and we don’t know when inflation is coming,” he told Barron’s. “We have to put in some assets that could benefit from inflation. Real assets historically were a small part of the portfolio, and we are certainly open to that being a larger piece.”

Gold consolidates

The gold market traded quietly last week – as it continues to build value around the $1,950 an ounce level. The gold market is trading well above its 200-day moving average (now around $1,700 an ounce), which is a technical signal that the rising trend in gold remains healthy and strong.

Gold is consolidating its incredible gains throughout the first eight months of 2020 –and gathering strength for its next leg higher with the next big price target at $3,000 an ounce, according to recent Bank of America forecasts.

Fed Meeting This Week

The Federal Reserve meets this Wednesday in its first meeting since its policy shift to a more flexible average inflation target. Investors are waiting for more clarity on this new policy and for how many years U.S. interest rates will remain at zero.

Current expectations are that zero interest rates are here to stay until at least 2023.

We will update you on important developments from the Fed this week. Stay tuned. In the meantime, please call a Blanchard portfolio manager at any time to discuss opportunities, wealth preservation and accumulation strategies in these interesting times.

Stay well. Until next week…



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