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Frozen by Uncertainties

October was a whirlwind month with markets rising back to all-time highs during the first few weeks, only to then back track, giving up their early month gains and more.

Driving the selling pressure were a growing number of uncertainties, including the potential results of the upcoming US elections, as well as surging COVID outbreaks across the US, Europe, and more.

Our Perspective

Late last week, investors received a strong reading on US GDP for the third quarter. After falling 31% quarter-over-quarter in Q2, GDP bounced back by a robust 33% in Q3.

While the bounce back is good to see, it still leaves GDP far off from where it was at the start of 2020 (a 31% decrease requires a 45% rise to get back to even).

It is also important to note that the early Atlanta Fed estimate for fourth quarter GDP is just 2%, and it is easy to see why the state of the economic recovery remains a concern.

We expect growth will ultimately settle in at an even slower pace than before the pandemic. With meager growth and numerous market uncertainties (e.g., US elections), we believed a balanced degree of portfolio risk is appropriate at this time.

Looking Through Earnings

Last week was the peak of third quarter earnings season, and as was the case last quarter, results have been very strong.

Well over half of S&P 500 companies have now announced Q3 results as of the end of the month. Of them, 81% and 86% have reported revenues and earnings above consensus Wall Street expectations, respectively.

Our Perspective

Results have been much stronger than expected, but a few factors are keeping them from being more supportive of markets.

As of October 30, the blended year-over-year earnings growth is negative 9.8%. The sharp decrease reflects the impact the pandemic and recession are still having on corporate profits.

Perhaps more critically, many investors are also growing concerned with the recent rise in COVID outbreaks both at home and abroad. The current bounce will mean little if we revert back to widespread economic shutdowns.

Until we have more clarity on several of these uncertainties, markets may remain in an uneasy place.

More than Just Jobs

The job market is improving, but there remains much work to do, and it is possible that long-lasting damage has already been done.

According to a recent report by Lean In and McKinsey, 1 in 4 women (and 1 in 3 mothers) are considering downshifting their careers or leaving the workforce altogether.

Our Perspective

The recession and pandemic-driven school closures are putting immense pressure on young families, and women are bearing the brunt of the burden.

The return of normal school and day care options, or even better or universal options, would help keep women in the workforce.

More workers means more output, and more output means a stronger, healthier economy.

For more, check out our recent blog post, The Economic Bounce, Where are We Now?

Our View
Economic Cycle		The economy is now in the very early stages of the economic cycle; how sustainable the recovery will be remains governed by the threat of the virus and the speed at which economic activity, business confidence, and consumer confidence normalize
Stock Market		The US stock market remains near its pre-pandemic high; valuations are again looking elevated, particularly in certain areas of the market; a wide range of risks continue to loom on the horizon as well, weighing on equities in recent weeks
Bond Market		Negative and ultra-low interest rates across the globe will remain a major challenge for long-term fixed income returns; credit spreads have tightened from peak levels, but still offer decent value
Foreign Exchange		While we believe the dollar may weaken longer term, short-term, it is difficult to make the argument that currencies will swing significantly
Important Issues on the Radar		Coronavirus: recent flare ups in the US and Europe are raising concerns that policymakers may reimpose mandatory stay at home orders and economic lockdowns Trade Tensions: relations have been in decline for some time, and rhetoric is likely to become more hostile with both US Presidential candidates looking to take a hard stance on China Eurozone Integration: stronger fiscal integration in the EU could be a significant positive for the currency bloc, although it is likely to be a long and noisy process to get there Inflation vs. Deflation: the significant demand shock makes it hard to call for inflation, but the sheer size of fiscal and monetary programs around the world should be a cause for concern

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