Economic data remained mostly positive through the summer months with strong job gains, a surge in housing activity and expansion signals from the business sector. But the recovery appears to be decelerating with much of the pent-up demand from the lockdown satisfied, the initial fiscal stimulus mostly sunset, and renewed virus concerns and government responses flattening mobility.
The COVID-19 recession hit small businesses particularly hard. Optimism has grown as of late, but many uncertainties remain. With nearly half of U.S. workers employed by small firms, it’s impossible to see a return to normalcy until the gap between large and small businesses narrows.
Technology companies that have driven the 84% rebound since March have led the recent decline, with the NASDAQ transitioning from a record high to a 10% correction in just three sessions. The consolidation of weight in the major indexes among the largest names works the same way on the way down as it does on the way up, resulting in heightened volatility.
The steady climb in the S&P 500® Index over the summer months pushed investor sentiment indicators to extremes. Now there are signs of frothiness in certain areas of the stock market. it wouldn’t be unexpected for stocks to pause in the near term to consolidate recent gains.
The Federal Reserve’s recent shift on inflation has major implications for the economy and the financial markets. The change signals the Fed intends to keep rates at near-zero for an extended period to let the economy run hot. While inflation risks have risen, so has some risk to equities.
Despite the unprecedented period of volatility, the S&P 500 has returned 9% this year and 22% over the past 12 months. While growth and momentum names continue to be the primary driver of returns (NASDAQ up 30% YTD), value and cyclicals have begun to participate.
