Fourth Quarter Investment Outlook

 In the short term, we expect four key drivers to affect market volatility: the election, news on a COVID-19 vaccine or therapeutic protocol, further stimulus and the flow of reopening the U.S. economy.

 In the longer term, we believe markets will reflect the foundational elements of economic growth, corporate profit growth and the level of interest rates. Our thesis of low interest rates for longer with consequent higher potential equity valuations remains intact. The one caveat is the possibility for interest rates to rise on Treasury refinancing.  U.S. public debt is now greater than 100% of gross national product.

Source: Eaton Vance Monthly Monitor, www.msci.com

9 months year-to-date through September 30, 2020

Global economies are rebounding from the pandemic’s initial highly negative shock, but the recovery trajectory appears weak. In fact, a second COVID-19 wave of infections has already begun in Europe.  International financial markets have lagged those in the United States. In spite of the negative news in the short term, we are looking for opportunities for the longer-term globally.

 We believe COVID-19 caused an inflection point in the economy and a new economic cycle has begun. This new cycle favors large, well-financed companies with durable competitive advantages. Both the U.S. equity and the fixed income markets have benefitted immensely from monetary and fiscal policy. However, these benefits have not accrued evenly across the country. Valuations reflect much of the current good news. That said, we see opportunity in continued short-term volatility.

2020: A Lost or Transformative Year?

Exhibit I

As the J.P. Morgan Global Composite Purchasing Managers Output Index (PMI) in Exhibit I shows, the global economy is recovering and improving. For September, output and new orders both rose for the third successive month. Further, this output growth included the United States, Germany and the United Kingdom. This data provides a first indication of worldwide economic business conditions. For the full year of 2020, the International Monetary Fund estimates a contraction of (4.9)% in world output, followed by 5.4% growth in 2021. The United States is expected to contract (8.0)% in 2020, with a modest bounce back of 4.5% in 2021.

 Looking at corporate profit growth in the United States, operating earnings for the Standard and Poor’s 500 Index of companies are on track to fall by 27% in 2020, and then grow by 44% in 2021. Going one layer deeper to sectors, the outlier on the high side of growth is technology, with 2021 operating earnings estimated to be 30% higher than 2019 earnings.  On the low side, energy operating earnings for full year 2021 are anticipated to be 39% lower than in 2019.

 Shifting consumer preferences is a durable trend. According to the U.S. Census Bureau, e-commerce retail sales as a percentage of total sales have gone from 11.3% in 4Q2019 to 16.1% in 2Q2020. While some may shift back over time, the trajectory has been upward over a multi-year period and has picked up speed in 2020. Many brick-and-mortar stores, restaurants and travel-related businesses have closed or seen profits fall sharply.  We see a further transformation within the retail sector with larger, financially flexible companies continuing to gain market share.

 The U.S. presidential election is just weeks away. The technology transformation to greater productivity by balancing technology with labor is a global phenomenon. COVID-19 is global. The lack of leadership from global powers prolongs the pandemic. We expect continued political and economic turmoil to cause volatility in the financial markets during this fourth quarter of 2020 and into 2021. This volatility is an opportunity to assess investment portfolios and make changes. The long-term trend of achieving more with less is critical to governments faced with deficits and high sovereign debt loads. The winner of the upcoming election will have influence, yet the financial markets will discount actual and potential corporate earnings growth over time.

 In summary, as we enter this fourth quarter of 2020, we believe the election, COVID-19 developments, stimulus and the trajectory of reopening the U.S. economy (and global economies) will drive volatility in the financial markets in the short term. Over the longer term, we are optimistic about the global economy’s possibilities. The world is working in partnership to solve the health issues surrounding COVID-19.  This cooperation can be the model for the future in solving broader economic, health, environmental and humanitarian issues that are here to stay.

 Bio:

Julie serves as our chief Investment Officer covering the following asset classes: Global Equity, Fixed Income and Real Estate Investment Trusts. She is involved in all aspects of managing client portfolios, and has worked in the investment business for over 30 years with a  strong track record in portfolio management, equity analysis, and client service.