Market week: U.S. stocks soar as Fed re-sets strategy

TSX flat as energy lags

The major U.S. stock indexes staged another solid weekly advance, as the U.S. Federal Reserve Board announced on Thursday that it is changing its inflation-targeting strategy. In a statement, the Fed said, “The Committee seeks to achieve inflation that averages 2% over time and therefore judges that, following periods when inflation has been running persistently below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time.”

The Fed also formally ended its reliance on the so-called Phillips curve, which posits that inflation rises in inversely to unemployment. The focus on a strong labor market is a radical change from decades-long Federal Reserve monetary orthodoxy, which tied a strong labor market to imminent inflation. With the change in strategy, the Fed will now be looking at an “average inflation target.” At a speech as the annual economic symposium in Jackson Hole, Wyoming, Fed Chairman Jerome Powell underlined the change, stating, “a robust job market can be sustained without causing an outbreak in inflation.”

Investors cheered the Fed’s shift in strategy, as the S&P 500 Composite Index gained 3.3% on the week, for an 8.6% year-to-date advance. The Nasdaq Composite Index rose 3.4% on the week, and is now ahead 30.4% year to date. Both indexes have recovered losses suffered during the March meltdown and have gone on to post fresh record highs.

In Canada, Statistics Canada reported that second quarter gross domestic product dropped at an annualized rate of 38.7%, a decline that had been expected as a result of the COVID-19 pandemic lockdown. In fact, a 6.5% month-over-month increase in June GDP suggests a recovery is underway, confirmed by StatsCan’s flash estimate of 3.5% growth in July. A 10.8% gain in disposable income and a 28% jump in the savings rate are seen as providing a cushion against the continuing high unemployment rate in coming months.

Toronto’s S&P/TSX Composite Index remained flat on the week overall, held back by lacklustre performance in energy. The market found some support in financial issues along with metals and mining, as gold gained 1.3% on the week and crude oil rose 1.6%.

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