Stocks sold off last week as COVID-19 cases spiked in the U.S. and Europe, renewed lockdowns were announced across Europe, and uncertainty around the timing of stimulus and the election outcome continued.

However, we remain optimistic that a sustainable economic recovery is unfolding that will ultimately support stock prices—despite headwinds facing economic sectors most exposed to the virus and limits placed on certain activities.

Considering the majority of Americans are in favor of a follow-on stimulus package, we expect one to be passed that will support the sectors most in need. This follow-on stimulus is now likely to be a post-inauguration event. We also do not expect any future lockdowns to be as severe as we saw in the spring and we remain encouraged by the therapeutics to treat the virus and the potential for a vaccine.

Third-Quarter GDP Report Shows Record Recovery

After the historic collapse in economic activity during the second-quarter lockdown, third-quarter economic activity rebounded at a record 33% annual rate. The unprecedented speed and size of fiscal and monetary stimulus applied starting in March prevented an even deeper slide in the second quarter and laid the groundwork for the rebound in the third. Even with this impressive rebound, the economy remains 3.5% below where it was pre-pandemic, which highlights the need for additional fiscal support.

Nearly all components of the economy increased significantly in the third quarter, led by consumer spending (up at a 41% annual rate) and residential investment (up at a 59% annual rate). This speaks to the health of the consumer that was supported by stimulus checks and enhanced unemployment benefits. Importantly, consumers were very healthy heading into the pandemic.

The health of the consumer was highlighted on Friday in September’s personal income report, which showed income increasing a better-than-expected 0.9% month/month—despite a decline in transfer payments (i.e., the end of $600/week extra unemployment benefits, and the fading of the extra $300/week). Supporting consumption, the labor market continues to heal—albeit not as fast as everyone wants. Initial unemployment claims and continuing claims continued to grind lower last week.

Corporate Profits are Better-Than-Expected

With over 73% of the S&P 500’s market capitalization having reported results, earnings have surpassed estimates by +19.2% in aggregate, with 84% of companies beating their projections. Health Care and Technology continue to show earnings leadership.

Remaining Encouraged by Chinese Data

We continue to follow China’s economic readings closely as they were the first in and first out of the pandemic lockdowns. The business surveys and corporate executive comments on third quarter earnings calls continue to suggest China’s economic rebound remains strong.

All of this has us remaining confident on a sustainable economic recovery regardless of who wins the election, and despite delays in stimulus and uncertainty created by the path of the virus.

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