Chief Investment Officer | Oct. 2020
The Uncertain Road Ahead
Our current assumptions are there will be targeted areas of lockdowns in problematic locations, but not a return to the nationwide lockdowns that occurred in March.
While manufacturing, distribution and logistic issues must be overcome in coming months, our assumption is that vaccine availability will ramp up through 2021.
We believe that the outcomes of either Democrat control or split government control will not meaningfully alter the pace of the growth in the near term.
We still think another round of substantial aid is in the pipeline, but the size, shape and timing of more policy support, especially around forbearance and corporate liability issues, will likely be determined by the makeup of political control post-election.
The fourth quarter promises to be eventful, with the outcome of U.S. elections, vaccine progress and hopes for an additional U.S. fiscal stimulus all up in the air. The recovery has gone much better than expected so far, but with momentum now slowing and COVID-19 cases again rising, the economy will remain reliant on policy support until a medical breakthrough provides the foundation for a more self-sustaining expansion. Indeed, the market volatility of recent weeks is a timely reminder that uncertainty is likely to weigh on the market in the near term. For the economy and stock market to resume their recovery from the March lows, several key questions will need to be answered.
#1 Will cold weather lead to another COVID-19 resurgence?
The recent dramatic increase in COVID-19 infections across the nation is concerning. It may be no coincidence that some of the states seeing the sharpest rise in new cases — including Alaska, Montana and the Dakotas — are among the coldest in the country. As temperatures continue to drop, forcing more activity to take place indoors, this could trigger a more widespread resurgence of the virus. Alongside the winter flu season, that would raise the risk of hospitals becoming overwhelmed and renewed restrictions on economic activity. Our current assumptions are there will be targeted areas of lockdowns in problematic locations, but not a return to the nationwide lockdowns that occurred in March.
#2 What is the timeline on a vaccine?
A sustainable return to normalcy in economic activity will likely depend on the development of an effective vaccine. The good news is that the all-out effort by the scientific community is heading in the right direction. Through the end of the year, data from Phase 3 trials will be released by several important vaccine developers. While there is likely to be a blend of good news and bad news, we remain optimistic that there will be evidence of sufficient strength, duration and safety for approval by the FDA of one or more candidates. While manufacturing, distribution and logistic issues must be overcome in coming months, our assumption is that vaccine availability will ramp up through 2021.
#3 Which party will control power in Washington?
History has shown that economic and profit growth are strongly influenced by factors other than who controls power in Washington. We believe that the outcomes of either Democrat control or split government control will not meaningfully alter the pace of the growth in the near term. Should President Trump hold onto the White House, his administration’s policies of lower taxes and less regulation would help growth. At the same time, despite concerns that a Biden administration will raise corporate tax rates, markets are finding encouragement in the potential for increased federal spending to boost near-term economic growth. We too are agnostic from a financial perspective on the election, seeing positive opportunities for investors regardless of the outcome (see our Election Special Bulletin). Elections bring uncertainty, especially in the short term if there is a sea change in who controls power. However, as that uncertainty fades, stocks tend to reconnect to fundamentals that are influenced — but not determined — by Washington policies.
#4 What are the prospects for further fiscal stimulus?
Perhaps even more than the election, what investors want clarity on is the next package of fiscal stimulus. Much of the economic and market strength we have seen over the past few months can be directly attributed to the unprecedented aid coming out of Washington. Trillions of dollars have been spent to keep families and small businesses afloat during the pandemic — and it has largely worked. However, many of these emergency programs have now expired or been exhausted. Although there is general agreement among lawmakers that more aid is needed, negotiations between Republicans and Democrats have seemingly reached an impasse. We still think another round of substantial aid is in the pipeline, but the size, shape and timing of more policy support, especially around forbearance and corporate liability issues, will likely be determined by the makeup of political control post-election.
Markets for the most part are expecting these issues to be resolved favorably, and we tend to agree. However, short-term investment outcomes are nearly always harder to predict than long-term returns. Ultimately, we expect that political clarity, medical advancements and continued economic reopening will pave the way for a stronger and more durable economic expansion, but the timing remains elusive. Flare-ups in volatility over the next few months seem inevitable as investors absorb news on the pandemic, the economy and politics. We still expect to see plenty of investment opportunities ahead as some uncertainties fade or market reactions create attractive entry points and highlight the value of active management. Until then, though, we believe we have the right portfolio positioning, focused on high-quality durable assets that can withstand uncertainty and minimize risk to client portfolios.
