Stocks last week continued to consolidate the significant gains made since the March low.
The resurgence of the virus, a lack of a follow-on stimulus package from Washington, and election uncertainty are all weighing on the market. We view the current correction as an opportunity for long-term investors for many reasons.
We expect the virus to remain a headwind for specific sectors of the economy for the foreseeable future. The consensus view is now calling for a vaccine to be ready sometime in the first quarter of 2021. However, a much lower mortality rate mitigates the importance of the rise in infections. Improved treatment protocols and heightened efforts to keep the most vulnerable isolated have pushed fatalities well below their April peak and considerably shy of their late July-early August levels, when new cases peaked. With new cases mainly affecting young people who are less susceptible to the virus, we see a low probability of a second major lockdown.
While the probability of a near-term follow-on fiscal stimulus plan has fallen with the election rapidly approaching, we expect Washington to ultimately provide the support needed for the sectors of the economy most impacted by the pandemic. The Problem Solvers Caucus (a bipartisan group in the House of Representatives) found bipartisan support for $1.5 trillion of additional stimulus while President Trump’s Executive Orders have temporarily extended a significant portion of the additional unemployment benefits. The Federal Reserve also has significant capacity to lend under their emergency programs. Regardless of the election outcome, we expect additional support to be forthcoming from Washington.
While the lack of a near-term stimulus deal is causing estimates for fourth-quarter economic growth to be lowered, they remain positive and indicative of the economic recovery that has been unfolding since the lockdown was lifted in May. Indeed, the Atlanta Federal Reserve’s latest estimate projects third-quarter economic growth at 32%, a historical snap-back from the second quarter’s lockdown lows (and a major reason for the lack of urgency for a follow-on fiscal package from Washington).
While the hospitality and leisure industries continue to suffer from the pandemic, there are other major sectors of the economy that are showing significant improvement. Housing and manufacturing have significant economic multiplier effects (many ancillary jobs are tied to them) and both showed further strength last week. Both new and existing home sales reached the highest levels since 2006 while the September Markit manufacturing survey reached its highest level since January 2019, suggesting manufacturing is expanding at a solid pace. These are encouraging signals from highly cyclical economic sectors.
Corporate profits are closely correlated with economic growth and improving economic readings suggest higher profits in the second half of 2020. The just released Business Roundtable CEO Economic Outlook Survey, a composite index of CEO plans for capital spending and employment and expectations for sales over the next six months, is showing a sharp rebound from the second-quarter low. Importantly, business confidence is significantly higher than after last decade’s financial crisis. Improving profits and business confidence imply that stocks will be fundamentally supported despite near-term volatility concerns.
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