In periods of market volatility, investors feel the need to “do something.” But, over the last 10 years, fund investors have under-performed benchmark indexes in large part by acting on their emotions in times of volatility.
Before the market collapse in March and rapid rebound, sentiment and risk indicators in the market signaled the inflection. Recently, many of those metrics that reflected substantial optimism at the end of August have rapidly reversed.
The housing market extended its strong post-COVID surge into August. Demand continues to increase for owner-occupied housing, pushed up by record-low mortgage rates, a rebound in the job market, faster household formations, and an increased desire for “space.” Existing home sales rose by 2.4 percent to an annualized pace of 6.00 million units for August, while new sales climbed by 4.8 percent over an upwardly revised July figure to 1.01 million units (annualized). The August sales pace for both was the fastest since 2006.
The post-COVID recession recovery continued at a strong pace in August with further sharp improvement for the labor market and solid expansion from the business sector. The rapid rebound in spending and hiring should drive a record 25-30 percent annualized surge in real GDP during the third quarter. After slower expected growth in the fourth quarter, the expansion should move forward at an above-trend pace in 2021 as vaccines become widely available. Key risks to the outlook include the timing of vaccine availability and the November elections.
Investors are paying closet attention to the election now, trying to gauge potential winners or losers. Historically, there’s been little difference in market performance no matter which party controls the White House or Congress.
Despite the dramatic decline earlier this year, the S&P 500 Index has not seen a three-week losing streak in nearly a year, and currently trades at the lowest level since early August. Context is important, however, as the S&P 500 enters the week just 7% below the record high and nearly 50% above the March low.
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