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Earlier this year, after the market plummeted, we presented two potential paths for its future:
If you recall, although most felt a W-shaped bottom was probable, our preferred and expected path was the V-shaped recovery. Because of that expectation, we did not flee stocks. Instead, we rotated into companies with the strongest earnings and sales. Thankfully, that plan has worked considerably well so far in 2020.
“Sticking to the plan” has been one of the keys to success. Maintaining a disciplined approach and not letting fear or panic dictate how we ran the portfolios during the March market crash paid off. It reminds us of Proverbs 16:3:
“Commit to the Lord whatever you do, and he will establish your plans.”
At Ambassador, we not only seek to multiply what God has entrusted us to manage, but we also commit to doing so in a biblically responsible fashion. By committing our plans to God and sticking to the “proud to own” plan, we avoid both fear and greed as motivating factors.
Now the path forward for the markets is still one marked with challenges and uncertainty. The August and September choppiness we spoke of a few weeks ago is still underway. With the U.S. economic recovery recently hitting a speed bump, the U.S. dollar has begun weakening. With a weaker dollar, commodity inflation follows.
With inflation clearly heating up, this presents good news and bad news. The good news is the Federal Reserve (the Fed) is doing all it can to prevent deflation from setting in. That can cripple an economy. The bad news is soaring commodity prices can also lead to higher consumer prices for an already shaky economy. The Fed is doing all it can to balance these two threats.
Last week, the Fed announced its July Federal Open Market Committee (FOMC) meeting minutes. The minutes reflect they are less optimistic about the U.S. economy, and thus they are considering lowering their economic forecasts for the second half of 2020. The minutes also showed that they expect GDP and unemployment numbers to be less robust than they previously forecasted.
The Fed continues doing all it can to stimulate the economy by keeping key interest rates between 0% and 0.25% for the foreseeable future. It will also continue purchasing $120 billion worth of Treasuries and mortgage-backed securities every month. These activities have certainly boosted the stock and housing markets!
We have seen the stock market hit new all-time highs, and the housing market is on fire too. Recently, the Commerce Department revealed that housing starts surged 22.6% in July to an adjusted annual rate of nearly 1.5 million units. Consumers are clearly taking advantage of low mortgage rates, and this is creating significant demand in the housing market.
Overall, the Fed’s actions and notes combined with the latest economic data and the lower summer month trading volumes have created a choppy market environment. This type of choppiness should most likely continue for at least a few more weeks. Any dips in the market should present good buying opportunities. The best path forward remains sticking to the plan as we navigate these choppy waters.
Sources: Yahoo Finance, Reuters.com, and JP Morgan Market Insights
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