The economy and markets continued their late-2Q rebound in 3Q20 amid tailwinds from massive government stimulus and signs of economic recovery. Investor optimism and hopes of additional stimulus drove equity markets to new all-time highs in late-summer, but markets pulled back in September as labor market improvement stagnated and the outlook for additional stimulus became less certain. Headed into year-end uncertainty around the US election, combined with lingering COVID effects on economic growth and labor markets, is likely to keep market volatility elevated.
KEY THOUGHTS
- US GDP sharply rebounded in 3Q amid massive stimulus, but with stimulus expiring sustainability of economic growth is in question.
- The US Presidential election is likely to keep markets volatile into year-end
- Labor market improvement appears to be stagnating as many industries (e.g. leisure) are not rebounding as quickly as expected.
- Return dispersion across sectors and industries should continue to create opportunities for active equity selection.
- Revised Fed policy implies rates will stay lower for longer, and changes many dynamics of fixed income investing.
S&P 500 Sector Performance (As of 9/30/20)
Presidential election uncertainty and expiring stimulus weigh on recovery and growth outlook
Third quarter 2020 was a roller coaster as the US economy officially switched from recession to expansion and US equity markets (briefly) made new all-time highs. However, by quarter-end momentum started to fade as concerns over the trajectory and sustainability of economic growth were amplified. Deadlock in the government over future stimulus efforts was a key headwind, as with millions in the service sector still unemployed (with no job prospects near-term) sustainability of the economic recovery without further stimulus appears unlikely. We see economic growth softening in 4Q as consumer reluctance to re-engage in leisure activities is compounded by decreases in consumer spending and sentiment.
Also weighing on markets into year-end is uncertainty around the Presidential election outcome. In the final days before the US election we would expect to see a further uptick in market volatility, especially around any increased rhetoric over contested election results.
Amid this landscape we remind investors to maintain investment time-frame discipline and look past the day to day noise. Labor market recovery will be a marathon and not a sprint, but given widespread expectations for a “V”-shaped recovery we see potential near-term for negatively revised economic growth outlooks. Dispersion in economic growth (e.g. technology vs. leisure) will likely create opportunities for tactical investments. In addition, given the technology sector’s increasing weight in the overall broad market (e.g. S&P 500), we think markets can remain resilient despite the volatility.
Exhibit 1: Jobless Claims
Total weekly unemployment claims surpassed 61mn in 3Q, but have been declining. However, the rate of decline is slowing as the labor market recovery stagnates. With further stimulus on hold, and consumers still leery of leisure activities, claims activity could spike again into 2021.
ENDNOTES
Disclosures
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
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A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.