The last week’s market highlights:
Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s Fourth-Quarter 2020 Outlook:
- U.S. economy: After the third-quarter bounce, a wobblier and flatter trajectory for U.S. growth.
- Global economy: Considerable fiscal stimulus should keep economies afloat.
- Policy watch: No Federal Reserve interest-rate hikes until at least 2023.
- Fixed income: Lean into higher-risk assets to generate income.
- Equities: Focus on quality across the board (and dividend payers, too).
- Asset allocation: Consider benefits of active management amid idiosyncratic opportunities.
Quote of the week:
I would a great deal rather be anything, say professor of history, than vice president." — Theodore Roosevelt
As always, Nuveen’s Global Investment Committee offers market viewpoints and perspective
If you’re looking to make sense of the always-shifting market and economic landscape, Nuveen’s Global Investment Committee (GIC) can help. This committee brings together the most senior investors from across the firm’s platform of core and specialist capabilities, including all public and private markets. In its recently published fourth-quarter outlook, the GIC offers insights for those who may have questions about the health of the U.S. and global economies, and what that may mean for equity markets. Below are two key takeaways:
- The “V-shaped” recovery has stalled. The global economy’s sharp third-quarter rebound (the upstroke in the “V”) has begun to waver. This is evident in JPMorgan’s Global Composite PMI for September, which dipped from August’s 17-month high. (Composite PMIs measure manufacturing and service-sector activity.) And while the governments of most developed countries continue to provide ample stimulus to support their respective economic comebacks, the U.S. has not. According to the GIC, this lack of federal support will slow the pace of the U.S. recovery dramatically as the year draws to a close.
- Equity markets reflect current (and future) fundamentals. Over the past few months, global risk assets, including equities, have been supported by: - Better-than-expected global economic growth- Promising news on one or more coronavirus vaccines being approved and widely adopted within a year- Extremely supportive monetary policy
Although the second and third factors remain firmly in place, the first is fading. Still, the slowing pace of growth around the world is not (yet) a reason to expect a sharp equity market correction, in the GIC’s view. Equity markets are forward-looking, meaning progress toward a vaccine and the economic normalization that represents—coupled with central banks’ ongoing commitment to low interest rates and easy monetary policy—should continue to support valuations, which remain relatively steep.
Once the U.S. economy is firing on all cylinders again, profits can surge across industries, including those that are currently most distressed because of COVID-19, such as travel and leisure. And even before a vaccine arrives, more fiscal stimulus can support troubled businesses, likely forestalling further market declines. Bottom line: staying invested in stocks allows participation in future potential upswings, while staying on the sidelines means missing out and falling behind.
With three weeks to go before the election, markets are pricing in a Biden win
Is a “Blue Wave” on the way? Oddsmakers believe Democrats have about a 2-in-3 chance to capture the Republican-controlled Senate. Likewise, betting markets now show Biden with a 69% chance of winning the White House (up from 58% on September 26). Polls, meanwhile, put the odds at around 90% (from 83%).2 Most recently, Biden got a lift from President Trump’s October 6 Twitter threats to derail COVID-19 stimulus negotiations.
Biden’s current lead doesn’t mean he is guaranteed victory, of course. Far from it. Any number of developments, including poor debate performances versus President Trump (assuming planned debates will still be held), could tighten the odds considerably. One lesson we learned from the 2016 presidential race: “It ain’t over till it’s over,” to quote Yogi Berra.
As the betting markets have moved, so, too, have financial markets. Last week brought preliminary signs that uncertainty over the election has begun to melt away. Among them:
- A broad “risk on” stock market rally. The S&P 500 Index and Europe’s STOXX 600 Index gained 3.8% and 2.1% (in local terms) for the week, respectively. Markets hate uncertainty, especially around an event as crucial as the U.S. presidential election.
- A weaker U.S. dollar. A Biden presidency will likely deliver a huge COVID-19 relief package, which would have to be financed via more government debt. Also, Biden is less likely to prolong (or instigate) trade wars. Diminished risks from tariffs and trade tensions should ease demand for safe-haven assets like the dollar.
- A rising inflation outlook, based on higher “breakeven” levels implied by U.S. Treasury market pricing. (Breakevens are a market-based measure of expected inflation.)
If current polls prove accurate, Biden will ultimately be declared the winner. Even if the networks fail to call the race for him out of an abundance of caution, as some states take longer to count their mail-in ballots, financial markets will “smell” a winner, and react accordingly.