MANHATTAN (CN) — Markets finished Friday building on the week’s earlier gains, erasing most of the year’s losses due to the Covid-19 pandemic and hitting new highs.
The Dow Jones Industrial Average gained 161 points, a 0.5% increase and 900 points lower than the index’s high point back in mid-February. The S&P 500 and Nasdaq both hit new high marks — of 3,507 points and 11,695 points, respectively.
With no blockbuster economic indicators, a smattering of smaller data moved the markets gradually upward during the day.
A modestly improving consumer sentiment report from the University of Michigan perked up some ears on Wall Street. The index rose 1.6 points from July to 74.1 points, though the index still remains 23 points below its pre-pandemic levels and 17 points below last August.
“Although strong gains in consumer spending from the 2nd quarter lows can be anticipated, those gains will significantly slow by year-end without some additional fiscal spending programs to diminish the hardships faced by unemployed workers, small businesses, as well as support for state and local governments,” university chief economist Richard Curtin wrote.
Investors also were heartened by the 1.9% increase in consumer spending last month, which signals that the economy continues to heal, even if slowly. Households still are spending 5% less than they did before the coronavirus hit the United States, however, and the lack of a stimulus package from Congress could restrict spending.
“Looking ahead, consumption should continue to firm as conditions very slowly normalize, but the steep decline in federal support for unemployed workers and heightened uncertainty will depress consumer confidence and spending and weigh on the broader economic recovery,” economists with Oxford Economics wrote in an investor’s note.
The trade deficit also widened last month, with the international trade deficit increasing 11.7%. While some exports saw an uptick in July, overall trade in goods is still significantly down from July 2019, with exports in total nearly 16% below last year’s levels.
Markets on Thursday had received a minor bump after Federal Reserve Chairman Jerome Powell announced changes to how the central bank addresses unemployment inflation. In remarks at the annual Jackson Hole Symposium, Powell said the central bank would allow unemployment to dip lower and that it wants inflation to reach 2% on average.
“Many find it counterintuitive that the Fed would want to push up inflation,” Powell continued. “However, inflation that is persistently too low can pose serious risks to the economy. Inflation that runs below its desired level can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations.”
Reaction to the news was mixed among financial analysts, with some saying the statements were lacking in specificity on how exactly the Fed would target inflation.
“The lack of specificity makes it a Fed watcher’s dream as it opens up a range of possible policy objectives that may shift over time,” said Tim Duy, an economics professor at the University of Oregon.
But just how much the Fed can do at this point is unclear. The federal funds rate is already at a historically low 0% to 0.25% rate, and the Fed under Powell has consistently rebuked calls to move into negative interest rates as Japan or parts of Europe have in the past.
“Given markets are already pricing in a fed funds rate at the zero lower bound for several years ahead, the use of these additional policy tools is likely to have more market implications than forward guidance on interest rates,” wrote Allison Boxer and Joachim Fels, analysts at Pimco.
Boxer and Fels stressed that because the Fed’s toolbox is limited, Congress will almost certainly have to step in again at some point. “With slack in the economy weighing on inflation and markets already pricing in highly accommodative policy, Fed officials will need help from fiscal policymakers to achieve the average inflation goal outlined in their new framework,” they wrote.
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