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Dear clients and friends,

At Perseus Wealth it is important to us that you are well informed about what is happening in the markets.  Here are a few of the key topics of conversation that deserve the most attention this month. If you have any questions or would like to continue the conversation, we would appreciate the opportunity to participate.

What’s Happening? October continues to show signs of an economy improving from its abrupt stop in the first quarter. While the nascent recovery is welcome, a closer look at the health of the economy reveals that, although many segments have recovered, others have not fared as well. Further, market impactors, such as the imminent elections and continuously delayed additional fiscal relief packages, create a significant amount of uncertainty that may not be settled for weeks or months (or even more). Let’s review the good and bad portions of the economic news and their potential impact on the markets:

The good news:

  • Consumer spending accounts for nearly two-thirds of the U.S. GDP (1) and is seen as an indicator of economic growth or contraction. Consumption, outside of travel-related services, movies, restaurants & bars and gyms, has seen a strong rebound.
  • Almost unbelievably, retail sales on a year over year comparison for the month of September are up 5.4% (2)!
  • Historically low interest rates, a super-demographic of millennials aging into their first-time home-buying years and remote working/urban flight resulting from COVID 19 have spurred significant growth in residential construction.
  • Fears of deflation have essentially disappeared for the time being, as CPI grew at 0.2% in September - an annualized rate of 2.4%.
  • Expectations for future profits have grown as companies have trimmed excesses they once had, both hard and payroll and are deploying capital to their business lines that have proven to be resilient in the new environment.
  • While the stock market has exhibited periods of volatility during September and October, it has not repeated the weakness seen in March of this year.
  • Financial stress in the banking system, measured by the St. Louis Federal Reserve Financial Stress Index, has improved from its extreme move at the beginning of the year (3). Similar relief has been seen in the Chicago Fed National Activity Index, which gauges overall economic activity and related inflation pressures, as it has moved away from the depths of March’s lows (4).

The bad news:

  • Although consumption is up, consumer sentiment has not enjoyed the same recovery. The most recent report from the University of Michigan notes consumer sentiment is still 26.5% below its December 2019 peak (5).
  • While consumers are spending in certain areas of the economy, they have dramatically cut in others. Drastic behavior changes have resulted in entire industries, such as airlines, hospitality, vacationing, restaurants and others needing to rely on relief from Washington D.C. or their local governments.
  • In addition to consumer sentiment being low, the Economic Sentiment Index, issued by Hamilton Place and CivicScience, shows confidence in finding a new job has dropped even lower than its reading in July, a sign that Americans are not convinced that the worst is behind us (6).
  • For those currently employed, initial weekly jobless claims as of October 15th indicated 900k jobs were lost in a week’s time, a number that is much higher than the highest levels of the Great Financial Collapse and 3.7% higher than the same measurement one month prior.
  • While jobless claims continue to stack up, Congressional action on additional relief has failed to materialize as lawmakers focus seem to be focusing their attention on confirming/stopping a new Supreme Court Justice, Amy Coney Barrett and their own reelection campaigns. The lack of attention to passing new relief packages has left many Americans waiting for clarity until after the early November elections. Once the elections are behind us, the hope is that lawmakers will be able to direct their focus on the needs of those effected by economic impacts of COVID-19.

What It Means: The S&P 500 and NASDAQ continue are close to their all-time highs set on September 2nd primarily on expectations of continued financial support from the Fed (interest rates and balance sheet expansion), further Congressional stimulus/relief packages and the incredibly outsized impact of a small handful of monolithic sized tech companies. While consensus expectations for corporate profits in the future are high, they are largely based on corporate budgets cuts and repositioning due to the shutdowns, not growth. While the U.S. economy and markets have demonstrated resilience through the revitalization of many industries (largely technology driven), others have not enjoyed the same rebound. As we head into the final weeks of the election season, headlines historically have a stronger impact on markets, adding volatility and there is no reason to believe this election will be different. If there is clarity of the election results (and acceptance), it should allow a much more comprehensive outlook of the future. In the meantime, investors should be cautious and mindful of their appetite for risk and reward as we head into the final months of the year. Defensive positioning is still recommended for the short to intermediate term future.

 

Best Always,


John and Sean

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that any strategy will be successful.