Key Market Driver: The Uneven Recovery Continues

The second wave of COVID-19 has hit some countries harder than others, leading to renewed lockdowns and mobility restrictions. Here in the U.S., the constraints have been targeted and regional in nature. This approach should lessen the impact on fourth-quarter GDP, only slowing what is likely to be a comfortably positive-growth quarter. ​

On the flip side, European economies have generally chosen to reintroduce national lockdowns. As a result, GDP growth for the continent will probably be negative for both this quarter and the first quarter of 2021 in what could be described as a “double-dip” recession.  ​

Asian economies, particularly China, have largely fought off the magnitude of the second wave, which should allow for an unabated recovery and economic expansion into 2021. Depending on their export dependence, some countries could see a slowdown in demand from trading partners most affected by the closures and mobility restrictions.

Our Perspective

Equity Markets


  • Several factors drove U.S. equities’ breakout performance in November, including increased confidence that the economy and earnings will continue to grow (assuming a vaccine is available early next year), an accommodative Fed, and better market breadth. More stocks are participating in the current advance versus the handful that drove the rebound over the summer. ​
  • Greater participation by the cyclical sectors of the stock market have helped developed international equities close a portion of the performance gap with U.S. equities. Despite the renewed constraints in many European countries, markets should look beyond any resulting economic weakness to a more robust and inclusive recovery in 2021. ​
  • Year-to-date, Japanese equities have performed in line with U.S. stocks thanks to the relative economic strength of its major trading partners. Increased domestic consumption is needed for this strong performance to continue. ​
  • Emerging markets equities have also closed much of the performance gap with the U.S. on the back of China’s economic recovery and stabilizing oil prices.
Bond Markets

  • The Fed’s apparent willingness to extend bond purchases to longer-dated maturities should put a ceiling on longer-term rates unless inflation risks heighten. Excess capacity, along with greater workforce productivity, should keep any inflation at bay for all of 2021. ​
  • Municipal bonds appear cheap relative to taxable bonds. The passage of a fiscal relief package that includes money for state and local governments would be beneficial for the tax-exempt asset class. ​
  • High-yield bonds are fairly valued at the current spread levels, given the lessened default risk and incessant search by investors for yield. Continued stabilization of energy prices will significantly help performance in this sector of the market. ​
  • Emerging market debt remains attractive due to Asia’s strong recovery, a weaker dollar and higher commodity prices. The recent outperformance of local currency debt may lead portfolio managers in this asset class to shift gears and increase weightings in dollar-denominated bonds.

Monetary Policies/Currencies

  • The Federal Reserve will likely maintain current interest rates throughout 2021 and appears ready to increase asset purchases if Congress continues to drag its heels on fiscal relief. With the Fed’s ease and higher projected deficit spending, we don’t expect any meaningful appreciation of the dollar heading into 2021. Better relative economic growth rates compared to many other countries should prevent further depreciation. ​
  • While the European Central Bank isn’t ruling out additional rate cuts, its preference seems to be more targeted relief for banks struggling due to interest-margin compression and higher default rates. ​
  • Despite signs of a strong recovery in production and exports, the Bank of Japan may keep rates and asset purchases at their current levels in response to pressure to offset the negative impact of the personal tax increase. ​
  • The Peoples Bank of China is the only large central bank that is even considering tightening. The strength of the renminbi and its potential to restrain exports is likely the only factor preventing near-term rate increases. ​

What This Means for Investors

As we finish an extremely challenging year and look forward to 2021, the virus pandemic continues to overhang markets. Even so, there’s a growing light at the end of this dark tunnel with one or more vaccines expected for distribution by the end of the first quarter. Equity prices may already reflect much of the economic benefit from the impending return to normalcy. Additionally, the low interest rate environment could cause income-starved investors to stretch further for yield and assume greater risk. The higher price levels for risk assets leave little room for disappointment.

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