The S&P 500, which the C Fund tracks, is in a somewhat bearish trend recently:
After its sharp March crash, the S&P 500 rebounded and hit new all-time highs in August and early September after several months of powerful fiscal and monetary stimulus. Based on technical indicators and option-buying activity, it reached rather euphoric levels and overbought conditions.
It then corrected downward a bit, quickly rebounded, and hit a “lower low” in October, and since then has been back on the downtrend. It had a bearish crossover for daily MACD, which indicates poor momentum.
Foreign developed markets like the I Fund have been similarly stagnant lately. There has been a bit more bullishness from emerging markets, led by China.
Despite a partial rebound, the overall employment to population ratio in the United States remains at levels not seen since the 1970’s. (In the decades before then, women were less in the workforce.)
This summer, many consumers and small businesses received aid from the federal government, which kept personal income up, and many small businesses solvent, despite high unemployment and poor business prospects. That expired, and the second round of stimulus has been in political gridlock for months.
It remains unclear if they can still pass a stimulus bill in the days prior to the election, and if they don’t, it comes down to the lame duck Congressional session later this year, or after late-January.
So, stocks have been quite “heavy” over the past month, seemingly unable to continue their meteoric rise, but also hesitant to move back down, with constant notification that about $2 trillion in stimulus could be injected into the economy again if a handful of political leaders can sort out their disagreements.
If we get a “no stimulus” environment for the next few months, it’s not hard to imagine further correction in stocks. At the same time, bank accounts and most Treasury securities pay interest yields that are below the prevailing inflation rate, including the G Fund, so investors have a choice to lose purchasing power slowly, or risk more volatility with equities.
For many investors, a mix of equities and bonds/cash is prudent, along with potential alternatives like real estate, foreign equities, precious metals, and other asset classes.
The good news overall is that the economy is healing slowly over time. This chart, for example, is from Discover Financial Services’ Q3 2020 earnings presentation, and shows that for many categories besides travel, spending has recovered over time:
Discover’s debit and credit card network focuses on the middle-class segment, so it’s a pretty broad breakdown of how many Americans are spending.
Much of this spending volume, however, occurred during and shortly after this summer’s stimulus. It remains to be seen what will happen with spending categories as we head into the next few months.
Lyn Alden is a financial writer and an engineer, and holds a bachelor’s in engineering and a master’s in engineering management, with a focus on financial modeling and resource management. She specializes in analyzing and presenting financial data. Her investment work can be found on LynAlden.com.