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Hope all is well with you and your family. The major U.S. stock indexes fell for the third week in a row, retreating again from the record highs that the S&P 500 and the NASDAQ achieved early this month. The latest week’s decline was much smaller than the previous week’s pullback. The big technology stocks that had led the broader market for most of this year extended their more recent run of underperformance, and the tech-oriented NASDAQ trailed the Dow for the third week in a row. As of Friday, the NASDAQ was down more than 10% from the record high it reached on September 2. The drop has me looking at signs.

Markets Signals Improving Economic Health
Small company stocks usually lead coming out of a recession. U.S. small-cap stocks had a breakout week, outperforming large caps by a wide margin. The Russell 2000 Index, a small-cap benchmark, gained nearly 3%. On a year-to-date basis, however, small caps continue to lag far behind large caps.  The outperformance this week could be indicative of markets starting to believe that the economy has turned and we are exiting the recession.

Near-Zero Rate Outlook
The U.S. Federal Reserve does not have enough visibility on the economy or the virus to raise rates any time soon.  They kept interest rates unchanged and signaled that it expects to keep its benchmark rate near zero for at least three more years. All 17 Fed officials who made projections said they expect to keep rates near zero at least through next year, and 13 projected rates would stay there through 2023.

Supreme Court Vacancy
This election was already shaping up to be one of the most bitterly contested in modern history, and filling the vacancy on the Court could lead to further division and only increases the uncertainty about the results.   Volatility has been rising lately as the presidential election draws closer. That isn’t unusual: Stocks typically sells off an average 2% from September to November in presidential election years.   What’s different now is the reactions to political events cause larger short-term movements in the markets than years past.

What Should You Be Doing With Your Money
With long term money that is invested in the stock market, it is best to hold and do nothing during periods of volatility.  If you have money on the sidelines then the steep sell off in the stocks with the biggest gains like Apple and Microsoft (the two largest companies in terms of valuation) has created a great buying opportunity.  These company’s earnings are not really linked to the election.  With the Federal Reserve promising years of low rates stocks like Apple and Microsoft which offer growth potential and dividends which are higher than money market rates will continue to see money flow in from investors as bonds and banks offer little to no return.

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