We are in the most uncertain of times. The global pandemic is still accelerating, and unprecedented policy stimulus, funded by unimaginable debt burdens, has been unleashed. Tens of millions have lost their jobs with many only just learning how permanent the losses will be as business shutdowns begin to ramp in coming quarters. There has been a very significant disconnect between the fundamental economic outlook, its implications for corporate earnings and the strength of equity markets. To some degree higher valuations are supported by the collapse in interest rates. How economies and markets evolve from here will be significantly influenced by both the path of the virus and by governments policy responses. In addition to taking interest rates to zero, monetary policy makers will continue with quantitative easing, but their efficacy in shaping economic outcomes is fading and the baton for economic management must now pass to fiscal policies for the heavy lifting.
Further digging into market behaviour also reveals a significant bifurcation, both in credit and equity markets. The winners and survivors are attracting rich valuations while the losers and the weakened are priced accordingly. While markets seem to be ahead of themselves, they are also behaving in a rational manner, rewarding winners and punishing losers. Winners may prove to be too expensive and the losers too cheap, but market behaviour following the bounce in late March/April has not been indiscriminate.
Drummond Brodeur, Chief Global Strategist for Signature Global Asset Management highlights these economic and market challenges in his outlook for the third quarter of 2020, “Bungee Jumping into Recession.” As economic momentum fades, as dire earnings reports and outlooks roll in, and as people begin to contemplate potential election scenarios, the potential for greater market volatility is heightened. The key watchwords for investors for the foreseeable future will be uncertainty and acceleration.
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Published July 21, 2020