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Weekly Market Update 8/28/2020

By September 3, 2020 No Comments

Fed Policy Shift

Yesterday, Federal Reserve Chair Jerome Powell spoke at the annual Economic Symposium in Jackson Hole and unveiled a landmark policy shift away from targeting 2% inflation towards an “average inflation targeting” framework.  Despite the unemployment rate hitting a 50-year low of 3.5% before the coronavirus pandemic, inflation has been persistently low and the potential for deflation poses serious risks to the economy.  Therefore, the Fed has now provided itself with the flexibility to allow inflation to run higher than the standard 2% target without requiring interest rate hikes and the stage has been officially set for interest rates to remain lower for longer.

Dow Back in the Green

The Dow Jones Industrial Average (DJIA) officially turned positive on the year, culminating an historic rebound from the March 23 lows that saw the index down over 34% on the year.  However, the DJIA has lagged significantly behind the Nasdaq and the S&P 500, which rebounded into positive territory in May and June, respectively.  Furthermore, two-thirds of the Dow Jones Industrials Average’s 30 components remain negative for the year as strength from Apple, up over 70% YTD, has provided an outsized benefit and has contributed over 1,200 points to the Dow this year.

Dow Shakeup

Monday night, the S&P Dow Jones Indices announced major changes to the makeup of the Dow Jones Industrial Average.  Exxon Mobil, Pfizer, and Raytheon will be replaced with Salesforce, Amgen, and Honeywell.  The DJIA is intended to represent the composition of the American economy and with technology stocks ballooning to roughly 28% of the S&P 500, while the energy sector has shrunk from 15% in 2008 to just 2.5% today, it makes sense that Exxon Mobil was removed to make room for the tech company Salesforce.  The changes will officially go into effect on Monday, August 31 and will end Exxon Mobil’s 92-year run within the Dow Jones Industrial Average.

Regards,

Ian Browning, CFA | Director, Investment Strategies & Shareholder
Peter E. Simmons, JD | President & CEO

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