Your Thursday Blip 8/27/20

Your Thursday Blip 8/27/20

The Dow busted out to new highs after the Federal Reserve instituted a new policy called “flexible average inflation targeting” which will allow inflation to run above the previous 2% benchmark. Investors liked the news and bank, real estate, material and industrial stocks propelled the Dow to a gain of 160 points at 28,492 while the tech heavy NASDAQ pulled back slightly. Trading volume increased indicating that institutions are net buyers of the Dow.
Goldman Sachs recently pointed out that market indexes are becoming concentrated due to the success of Facebook, Micropoopie, Amazon and Google. They point out that these four stocks now comprise 23% of the S&P 500 Index and 37% of the Russel 1000 Growth Index and are driving the recent market surge. This narrowing of the market increases risk and means that some mutual funds will have to re-register as non-diversified funds since SEC rules prohibit diversified funds from being concentrated in one sector or stock. This situation bears watching since this is what happened in 1999/2000 when the dot.com bubble broke and indexes went on the post three negative return years in a row because they were so concentrated in tech stocks. We are keeping a watchful eye on this trend and are mindful to not repeat the errors of the past.
Federal Reserve Chairman Powell at the virtual Jackson Hole economic conference said the Fed will change the way it looks at inflation and now allow inflation to run above the 2% benchmark that has been in place for years. The world economy right now is suffering from deflationary pressures and economies in Europe have been praying for inflation and growth for some time. The Seattle Times had an article about how Europe faces massive layoffs (59 million estimated) in the coming months as big companies try to “right size” in the face of the pandemic and the EV revolution. This move by the Fed might be indicative of an effort to keep interest rates low and inflation/growth alive in this age of lockdowns, layoffs, trade disruptions and cost cutting advances in technology by US firms.

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