Global stock markets remain mixed this week, as investors continue to parse through incoming economic data, prepare for a likely volatile election season, and try to understand who the next winners and losers will be in the markets as we look head. A deal in Washington to support the economy further remains unlikely, but some indications of interest in bargaining were announced from the White House, adding hope to the process. Meanwhile, economic data continues to mostly surprise to the upside, with unemployment claims declining further, outperforming expectations, as manufacturing activity also climbed. The Federal Reserve also made news, with their final meeting before the November election reiterating that rates would remain at zero through at least 2023, and that fiscal stimulus from Congress was vital for the recovery to continue. Interestingly, the Fed’s stimulus program of purchasing bonds has slowed and their balance sheet has actually declined, leaving many wondering if they have backed off from their prior commitment of stimulus due to the appearance of well-functioning financial markets and a rebounding economy. This has left many scratching their heads. Meanwhile, the nascent rebound in economic strength continues to be supportive of risk assets and is encouraging for US consumers, the employment picture, and corporate profitability ahead. While the staggering losses from the shutdown were unprecedented and meaningful, much of the losses have been restored, but the pace of progress is beginning to slow. The next leg of the recovery is likely to be an uphill battle, as the easy gains have been made and the labor market may take years to return to the levels seen in 2019.
It appears that markets are desperately trying to determine where we go from here, as equities have rebounded and stabilized, but need new leadership from here. As we have seen from the volatility in technology shares as of late, the leaders of the rally are losing confidence from investors who fear that a continued swift reopening with a rapidly deployed vaccine could undermine the recent success of these “work from home” companies. If such a scenario were to play out, we would anticipate more cyclical, economically-sensitive areas of the market to lead equities higher from here, resulting in a massive rotation and turbulence beneath the surface of indices. This may already be playing out as we have seen in recent weeks, but it very well could be a head-fake if the pandemic’s effects ultimately last longer and the economy is slower to reopen than planned. We are of the opinion that technology stocks will continue to dominate for the longer term, with secular trends in place that favor their continued climb higher, but that in the near term stretched valuations will keep further gains from realization. Other areas of the market that have lagged and remain at a loss for the year provide better risk-reward opportunities in the near term, and we are looking to exploit this differential. Meanwhile, the election in a few weeks’ time brings the potential for further volatility, so we will be defensively posturing portfolios and raising some cash to be prepared. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.