Fall Brings Cooler Perspectives
Fall is officially upon us, and with it hopefully some sense of normalcy in a year that has been anything but. The leaves will turn colors, the mosquitos will retreat, and cooler temperatures will prevail. We also believe that the fall will bring cooler perspectives on the economy and markets. Below is an overview of the 4th Quarter market outlook.
Overview
The global economy will likely expand over 10% in the third quarter, after having contracted around 10% over the past two consecutive quarters. The fourth quarter should see global growth cool to around 5% as the recovery slows. The United States should also see future growth slow after the third quarter. The U.S. lost over 20 million jobs at the beginning of the pandemic and has seen a sharp bounce back, but it has only recovered roughly half the number of jobs lost. Industries like hospitality and travel will be slower to recover.
The S&P 500 has recovered and touched all-time highs again due to several factors. First, stock markets are forward-looking indicators. Secondly, policymakers in Washington and the U.S. Federal Reserve have acted to support asset prices and those who have lost their jobs. Finally, this index doesn’t tell the full story. If you exclude the five largest stocks of this index, the S&P 500 is negative on the year and many other indexes have not fully recovered, including small-cap, mid-cap, and international indexes. Growth-oriented stocks are trading at valuations not seen since the dot-com bubble, and this gap between value-oriented stocks has widened.
While stock markets seem largely overvalued, the same could be said for bond markets offering very low yields across all maturities. Bond investors may be taking on a lot of interest-rate risk (bond prices fall when yields rise) in return for little yield. Additionally, the amount of yield offered in high-yield bonds does not seem to adequately compensate for the increased default risks.
The fourth quarter could see investors cool their expectations around the speed of economic growth. We are recovering, but the road ahead may be longer than what markets are currently pricing in. We don’t expect stock markets to go back to March lows, but we do anticipate volatility in the fourth quarter with valuations seemingly stretched in both bonds and stocks. Flu season is back and there will likely be an uptick in COVID-19 cases, and let’s not forget about the election in November. Read more about market influences in the upcoming election and reasons why you shouldn't vote with your portfolio in the 2020 Election and what it means for the markets.
Conclusion
The fourth quarter could bring us cooler temperatures and possibly cooler growth perspectives. There are many risks to consider, such as high equity and bond valuations, slower growth expectations, and a looming presidential election. However, valuations can be stretched for long periods and central banks and governments around the world have strong commitments to support economies. Timing the market is not wise and neither is voting with your portfolio.
We continue to recommend being diversified in asset classes including bonds and equities with sticking to long-term goals. We reiterate that taking too much risk and having the market pullback is a risk that many investors fear the most. The other side of the equation is getting out of the market and missing the recovery, which is an extreme action we generally do not recommend. Understanding your specific goals and objectives becomes even more important now. Please contact our office if you would like to schedule a call to review your investments and financial planning goals.
*You can view the full outlook on Cetera's Market Perspectives. Market outlook created by Cetera® Investment Management. Cetera Investment Management LLC is an SEC registered investment adviser owned by Cetera Financial Group®. Cetera Investment Management provides market perspectives, portfolio guidance, model management, and other investment advice to its affiliated broker-dealers, dually registered broker-dealers and registered investment advisers.