Key Market Drivers

The Bumpy Road to Recovery

The U.S. and many world economies showed a rather dramatic rebound in the third quarter from the depths of the pandemic-induced recession. That said, U.S. GDP is still down for the year and will be down for the full year, even if optimistic forecasts for 5% fourth-quarter growth come to fruition. The pathway and timing for a complete recovery to pre-pandemic levels depend on the extent to which the second wave of the virus strains hospital capacity and leads to the reimplementation of social mobility restrictions. Adding to the uncertainty is the willingness of consumers to re-engage in specific sectors of the economy, like travel and tourism.

Negotiations for another fiscal stimulus package are at a standstill, bogged down by the sharp political disagreement over the size and scope of the relief. There is a hope that after the election, Congress and the White House can come together to provide aid to struggling businesses and their employees.

Overseas, many European countries have reinstated lockdowns. However, government officials are quick to point out that the restrictions are not as broad as those imposed earlier in the year. China and other Asian countries have had more success in keeping infection rates low, leading to a more persistent economic recovery. Japan, in particular, is benefiting from the rebound in China and the other global economies.

Our Perspective

Equity Markets


  • U.S. equity markets have trended sideways but mostly downward since the summer, likely an indication of the slowing global economic recovery and fear of a virus resurgence. While a broadening of market participants in an upward move would be welcome, sectors benefiting from work from home trends and the search for COVID-19 treatments will probably be the best performers for now.
  • International equities in developed markets, particularly Europe, may struggle with a more pronounced resurgence of the virus and a more aggressive governmental response to control the outbreak.
  • Japanese equities are better positioned, given their export proximity to China and their ability to take advantage of the U.S. economic recovery. Considering the country’s weak domestic consumption, sector allocation and stock selection are extremely important for success in this market.
  • By far, mainland Chinese equities have been the best performers in 2020. China tackled COVID-19 most aggressively and appears to have emerged with fewer concerns about a resurgence. Watch for any slowing of the global economic recovery, which would put pressure on these markets. Exports are a large percentage of the Chinese economy and corporate revenues.
Bond Markets

  • The greater than anticipated economic rebound and the prospect of higher deficit spending have put upward pressure on U.S. Treasury yields. Even so, the Fed will resist letting the ten-year yield move notably above 1.0%.
  • Investment-grade and high-yield spreads against Treasurys continue to narrow as investors search for enhanced yield in their fixed-income portfolios. Credit pressures appear to be confined to the energy sector and service industries directly impacted by reduced consumer spending.
  • The municipal bond market would welcome federal fiscal relief for struggling state and local governments. Selectivity around state and revenue project issuers has never been more important, given the uneven effects of the pandemic.
  • The strong dollar and renewed weakness in energy prices are placing pressure on emerging market bonds. Below-investment-grade U.S. markets are likely a better place to look for yield over the coming months.

Monetary Policies/Currencies

  • The Fed has essentially pledged to maintain zero rates and provide stimulus through its longer-term bond-buying program. The use of negative interest rates and yield curve control at the longer end of the spectrum appears unlikely for the time being. However, they remain in the Fed’s toolbox.
  • The European Central Bank and the Bank of England appear poised to react sooner than the Fed due to the region’s higher infection rates and more stringent mobility restrictions.
  • The Bank of Japan is in a holding pattern, given the rebounding economy and limited concerns of virus resurgence. The bank needs to continue to offset the contractionary impact of the consumption tax levied last year.
  • The People’s Bank of China remains the tightest of the large global central banks. Its relatively restrictive policy has caused notable appreciation of the currency, which should prevent any meaningful rate increases moving into 2021.

What This Means for Investors

Without an effective vaccine adopted by a large portion of the population, the pandemic will continue to loom large over the heads of the global economy and the equity markets. Continued monetary ease, but most importantly fiscal relief, will be needed to prevent broad economic stagnation or a descent into a second recession.

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