9/20/2020: Weekly Wrap-up and What to Expect

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Fed Chairman Jerome Powell announces near zero interest rates until 2023 and higher inflation rate targets, but no detailed plan around quantitative easing, shaking the markets.


Market Movers

The S&P 500 dropped ~1.3% last week for a second consecutive week of decline. This decline was largely due to continued tech sell-off as Fed Chairman, Jerome Powell, did not detail any additional forms of quantitative easing to back his plan of low interest rates and higher inflation. Furthermore, we have seen a plateau in the daily number of cases and deaths due to COVID, raising red flags for investors and reopening considerations. There’s a lot going on, but we’ll break it down for you. Here are the details:

  1. 📈 Daily COVID cases and deaths stabilize while hospitalizations continue to decline. After declining for several weeks straight, daily COVID cases and deaths have now stabilized as states in the Midwest continue to struggle with COVID cases. For example, North Dakota, Wisconsin, and Montana hit all-time highs for cases in the last week. While this is more of a neutral result, the decreasing number of hospitalizations is promising and indicates that the newly infected people typically have mild cases and do not need hospitalization.

  2. 📈The number of reopened / reopening states increased by two, driven by Washington and Florida. With the virus count decreasing in most states, we’ve seen a greater number of states reopen or stop the reversal of their reopening process. At this point, 31of 50 (62%) of states are in the reopening process or have already reopened. However, it may be too early to celebrate and we may be at an inflection point downwards given high case count in the Midwest, where most of the states are considered “reopened.” If we continue to see case count go up in the Midwest, there may be reversals for states that have reopened in attempts to curb case count.

  3. 📈 Unemployment claims decreased by 33K since last week to 860K claims. Overall, the market did not react significantly to the decreasing unemployment claims report given it was so minor. We hope to continue seeing this decline in unemployment claims, which would indicate economic recovery as jobs are created and individuals find employment. We’ve seen this decline slow down significantly, so there may need to be a large catalyst before we see another big drop in unemployment claims (e.g., vaccine or government stimulus).

  4. 📈 Fed Chairman Jerome Powell indicated low interest rates for next few years, targeting inflation at above 2%, which will likely drive up stock prices. Last week, Powell set a goal for interest rates to remain near zero until 2023 and for interest rates to reach above 2% for a prolonged period of time. However, the Fed does not anticipate increasing bond purchases, for now. What this means for the stock market is that equities will likely increase as people seek appreciation above the 2% inflation rate for their capital. Furthermore, it seems like government stimulus and Fed bond buybacks seem to be put on halt until things get worse. At this rate, it seems like a matter of when rather than if stimulus and bond buybacks need to increase.

  5. 📉 However, Powell did not detail any plays for additional quantitative easing, which the market was expecting. The market reacted positively for a moment when Powell indicated low interest rates and higher inflation targets, but failed to detail any quantitative easing plans (e.g., bond buying). The broader market, especially tech, has rallied significantly on the expectation that quantitative easing would increase with this goal of higher inflation. This consideration has brought down the market toward the end of the week and may continue to drag down markets over the next couple weeks until more detail around quantitative easing is announced.

WX Capital believes there could be a near-term correction in the broader market and especially in tech. However, we anticipate outcomes driven markets like biotech to remain strong. Over the past week, we’ve seen a significant market drawback, concentrated in overvalued tech. However, we’ve seen the biotech market fair well given its general disconnect from macroeconomic considerations. We may see a drawback in the general markets and biotech, to a less degree. We hope that the market is cognizant enough of the difference between biotech and broader market considerations, so that biotech may even perform positively. As always, please don't hesitate to reach out with questions!


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