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October 2, 2020
The third-quarter rebound in the U.S. economy, which will be reported at the end of October, was likely over 30%, a sharp turnaround from the 5% and 31% falloffs in the first two quarters. Even so, the economy may not fully return to pre-pandemic levels until the middle of next year. However, housing and capital spending have essentially made up all their lost ground. The rebound in capital spending, which is centered on technology investment, bodes well for productivity growth. Higher productivity could keep inflation low and help corporate margins advance.
As the quarter ended, there were signs the recovery may be leveling off. The COVID-19 economy has become increasingly more bifurcated between tech-sensitive industries that benefit from the work-from-home trends and those dependent on direct consumer engagement. The global resurgence of the virus has hindered reopenings and full consumer re-engagement in the travel, leisure and retail industries.
While nationwide lockdowns are not likely, any targeted or regional closures would further delay the reopening of certain sectors and prolong current capacity restrictions. In addition to infection and mortality rates, government officials are keeping a close eye on hospital utilization rates to get a better sense of the strain on the health care system.
In August, U.S. equity markets moved to new record highs, more than recovering from the previous quarters’ sharp losses. This rebound was followed by a 10% correction in September, which many investment professionals view as a healthy occurrence. That said, the correction could also be a harbinger of coming stagnation in economic growth, and likely reflects the impact of a second virus wave and the deepening partisan political divides.
Growth stocks outperformed value stocks again during the quarter. The price premium has increased for companies that can consistently grow revenues in this uneven recovery. Better breadth of market participation would signal greater market health. But even with the September correction, there was no discernable rotation to the more value-oriented, cheaper sectors of the market.
With an apparent plateau in economic growth, equity markets seem to be keying in on other potential risks. The intensity of the presidential election season may provoke some near-term volatility. However, we again remind investors that political issues pale in comparison to the analysis of the economy in attempting to discern longer-term market direction. Trade risks do not appear to be as market moving as they were last year. But growing tensions with China could revive talk of tariffs and other trade barriers. The progression of the virus going into flu season is likely the most significant risk to the markets. Optimism over the development of an effective vaccine by year-end may be misplaced, with the economy still having to adapt to virus surges and continued restrictions. It’s more realistic to expect full consumer re-engagement and complete economic recovery sometime in 2021.
For more market insights, contact a Cerity Partners advisor or visit the thought leadership section of ceritypartners.com.
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Partner & Chief Investment Officer
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