Summary

  • The magnitude of the recovery has surprised to the upside, especially in the US. Business survey, consumption and housing data strengthened through September, despite an increase in COVID-19 cases.
  • Congressional disagreement, the SCOTUS appointment and election campaigns have postponed approval of another round of fiscal stimulus until after the November elections. Growth will suffer in Q4 but rebound in Q1 and Q2 2021.
  • If Biden wins the presidency and the Democrats win a majority in the Senate, there is likely to be multiple compression and greater volatility in the markets as a result of policy uncertainty, higher long term interest rates and the prospect of higher corporate and capital gains taxes.
  • Equity valuations, especially in the US, are pricing in a V-shaped earnings recovery in 2021. We expect global equities to be supported by the lack of investment opportunities in a zero and negative interest rate environment. Further upside in equity markets will need progress towards a vaccine and/or further stimulus. Cyclical sectors will likely outperform in the next 12 months.
  • The Fed’s “flexible average” inflation targeting (FAIT) strategy translates into keeping its policy rate at 0% through 2023 -2025. This will avoid the upward pressure on interest rates which usually accompanies fiscal expansion. For this reason, the Fed’s policy enhances the effectiveness of fiscal policy at a low cost although it constrains monetary policy. Global central bank asset purchase programs created a backstop for credit markets and we foresee stability going forward.
  • Uncertainty surrounding the US elections will be the key theme for markets in Q4. The next six months present upside and downside risks associated with renewed US – China tensions, a second wave of COVID-19 cases, Brexit negotiations and policy decisions.

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