Another Wild Week

This past week was a wild one on Wall Street. Stocks started out on a positive note, but on Thursday and Friday the tech-heavy Nasdaq fell almost 7%. Many individual tech stocks were down as much as 20%. There were several reasons for the decline, including tech stocks had run too far, too fast. On the flip side it was another good week for stronger than expected economic data. Let’s dive in.

Apple & Tesla

An interesting dynamic of late has been the rapid stock gains that Apple and Tesla have seen after announcing stock splits. A stock split doesn’t alter the valuation or market capitalization of a company. It does bring down the price per share while increasing the overall share count. Since their respective split announcements, both Apple and Tesla have seen their stocks soar, far outperforming the market. With no company news to justify a move of this magnitude the case could be made that these stocks, along with many other tech names, have gotten a little ahead of themselves. However, the longer-term outlook is still bright for much of tech.

The last four months the economy has had a strong recovery and financial assets have had a powerful rally. This is true for stocks, bonds, gold and bitcoin. A critical factor for this rally has been the 23% increase in the money supply. This is three times the previous high over the last 15 years. This change in the money supply has been a combination of the Federal Reserve’s asset purchases, government spending and a major increase in household savings. A key question going forward will be how markets and the economy fare when it comes time for the money supply growth rate significantly slow.

Jobs Report

The Labor Department released the August jobs report and like prior months it continued the trend of better than expected economic data. Employers added 1.4 million jobs, including strong gains in retail, health services and education. The unemployment rate declined to 8.4% from 10.2% in July. This was a major surprise as expectations were for a rate of 9.8%. There were many economists who projected the unemployment rate would not decline to single digits until 2021.

Manufacturing Rebound

Manufacturing in the U.S. continues to rebound as the ISM PMI Index came in at 56 vs expectations for 54.8. A reading over 50 indicates an expansion. In a change from the last 10 years, manufacturing has recovered faster than services which have been more limited due to the coronavirus.

Tech stocks have led the stock market recovery, but with September historically being the most volatile month of the year it is as good a time as any for a healthy pullback in the stay-at-home winners. The election is only two months away so uncertainty about the outcome will also contribute to heightened volatility. However, as long as the economic recovery continues to exceed expectations look for any pullback to be short-lived. We trimmed our equity exposure in August so we will be in good position to take advantage of any decline in stocks.

With the month expected to be action-packed, we will be here closely monitoring the markets. Have a great Labor Day weekend.