Equity markets continued their plunge this week, nearly erasing gains for the S&P 500 this year, led by technology stocks. The decline was broad-based, sparing very few firms from the selloff. Fears of a renewed surge in COVID cases in Europe put investors on edge, while testimony on Capitol Hill from the Federal Reserve and US Treasury reiterated the absolute need for more stimulus to keep the US economy afloat. The passing of Justice Ginsberg all but eliminated hopes of any bills being passed in Congress, however, as both sides of the aisle entrenched for a bitter election over the next two months. Markets reacted appropriately to these negative developments, reducing risk and dimming the outlook for a continued rebound in economic activity and asset prices.

Despite ongoing stronger-than-expected reported economic data, the US economy remains well below potential and the unemployment rate close to double digits. Some pockets of prosperity remain, particularly housing and manufacturing, but the services economy which makes up the bulk of economic growth, is suffering from lack of demand. Even ports and railroads are seeing record volumes as stores restock and consumers continue their stay-at-home purchases, but much of that is likely a one-time bump that will fade in the coming months. In fact, the more real-time, higher-frequency data is trending lower, with dissipating expectations for higher growth. Businesses continue to express that risks remain to the downside, with election fears and the virus dampening expectations. Meanwhile, economists now predict that the lack of a deal from Congress would cut economic growth by 5 percentage points in the 4th quarter of this year. This will likely lead to funding problems for states and local governments, as well as small businesses, which could result in additional layoffs and business closures. The effects of aid should not be understated, with the Fed, markets, and businesses pleading for additional aid to bridge the output gap from the lingering downturn.

Given the uncertainty facing the next several weeks, we will remain defensively postured and be raising a limited amount of cash to be better prepared for volatility ahead. Equities have fallen dramatically from their high in August, but remain positive for the year, and we are constructive on the outlook past election season. While we fully expect some big price action in the near term, we believe that trying to time this market is extremely difficult given the trifecta unknowns: COVID’s future course, the fate of fiscal stimulus out of Washington, and the determination of the next administration. Record low bond yields and ongoing liquidity from the Fed remain supportive of risk assets for the years ahead, providing enough of a tailwind for us to stay mostly invested despite the risks. 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.