Hello. This is our weekly market video for the week ended August 28, 2020 and I’m trying out a new virtual background, so you don’t see the wall and the door and the ugly background that I had before. So, this is new technology so if something weird happens on the screen, then you’ll know it’s because of the virtual background that I’m using. Let me know what you think if you like it or not. Basically, this week we had some very important information come out of the Federal Reserve. As always, what comes out of the Federal Reserve is very important, but certainly, this week they announced a two significant changes in their policy going forward and we believe those police changes should be positive for our investments and for the future of the stock market and the bond market in the short run anyway. So let me go over the two big things. One was they said that they are now going to target an average 2 percent inflation rate over time.
Okay. So what that means is that before, they said it had to be 2 percent. Now they’re saying it can average that, meaning that it could go up to 4, it could go down to 1. As long as it averages 2 percent over time, they feel they’ve accomplished their mission. Now I don’t know how you do that without a crystal ball because how do you know what the future is so that you can know what your average is going to be, and you’ll notice I do have a crystal ball there in the background under that painting. However, I’ve never figured out how to turn it on, so it doesn’t really work very well for me, but be that as it may, that’s an important thing. What that means is is that they may let inflation rise beyond the 2 percent that was their former mandate. The second thing that they said which is very interesting and different is that they won’t feel obligated to raise interest rates if the economy is running at full employment. So in the past, the policy was that when we’re at full employment, the fed is going to gradually start raising interest rates. The thought behind that was that if we have full employment, people have money they’re spending. If they spend, prices rise, we have inflation and we don’t want that so therefore, we started raising interest rates. This now says we’re not going to do that.
Now last year and before the pandemic, we had very high employment, almost full employment and yet we had no inflation to speak of and therefore, we believe that’s why they’re saying that. So going forward, they’re going to be looking at inflation itself rather than employment as a driver of inflation, and so what does that mean in terms of where do we go from here. Well, two things. One is they’re probably not going to be raising interest rates for 3 to 5 years because the economy needs to recover for us to get the full employment. That’s going to take a while before we start seeing inflation and all those kind of things, and certainly the economy right now is not in any shape where the fed’s going to raise interest rates in our view. So what does that mean? Well, companies want to know the price of the money. The cost of borrowing and all that kind of stuff and now it looks like we have a level of certainty, a level of confidence about that and so therefore, that will encourages companies to borrow money and to invest and grow, and that is a good thing. It should help profits. Low cost of money should also help profits, so we believe this will help the stock market, the S&P 500 index and the Dow to go up going forward. Now the other thing that the Federal Reserve basically did was it told the bond market the same thing and the bond market is, as you know, if you’ve watched our videos over time, is affected by rising interest rates negatively generally speaking and so that has been essentially taken off the table for a while. So it looks like for the bond market, we have calm. Investors like calm in general and so that should be good there. So from that standpoint, things look pretty good.
The other thing that of course we’re looking at carefully and watching, but we believe should resolve itself is the battle royale, if you will between the democrats and the republicans over the next package to give people who have lost their jobs. And that is one of the biggest reasons why the stock market is up despite the economy being down and that is that even though people have lost their jobs, they have the ability to make their mortgage. They have the ability to pay their rent, buy food, all those very important things to consume and because of the $600.00 a week and the unemployment benefits that they’re getting. So that needs to continue. If it does, then we see that as being a positive as well and things should be okay. Now of course, if it doesn’t, then Katie bar the door, we could see a massive drop in the market if that were to happen. So I think all the politicians are aware of that in an election year. I don’t think they want that, but stranger things have happened. So those are the two biggest drivers.
Now of course, the elections are now official. We know that it’s Donald Trump and we know that it’s Joe Biden and so, now we go into the election season full blown and we’re going to start being bombarded by commercials and the debates and all that kind of stuff and then we head into elections. Right now, it doesn’t appear that investors are particularly concerned about what’s going on on the election front, and again, we believe that that is because the drivers right now are the Federal Reserve keeping interest rates low and being committed to buying up the banking system and whatever it takes to keep stability there. And of course, the democrats and the republicans coming forth with a package, so it appears that everybody believes that’s going to be the case and therefore, we should continue to see positive signs in the market. So right now, the elections don’t seem to be a big driver at this time. In the past, we have seen it be a big driver of the market, but right now, it seems to be a non-event as I record this. So where does that leave us? It looks like things are okay. It looks like there’s the potential for a storm, but we don’t believe that storm will come and so, we think that it looks positive going forward. So thank you for letting us be your retirement planner.
Thank you for letting us guide you through this pandemic from a financial standpoint. We’re very, very conservative as you know and we do that because we went your money to last as long as you do, and we want you to have financial peace of mind and so, to the extent that we’re able to do that, we feel that we’ve done our job and we thank you for letting us do that very, very much. So I hope you are staying sane. I hope you are staying healthy and I hope you like my virtual background. Let me know what you think. Okay. So we’ll talk soon and thank you again.