The global economic recovery started to cool in the third quarter as fiscal stimulus lapsed and second waves of the virus hit Europe and the U.S. Much of the market recovery in the second quarter was driven by fiscal stimulus and the relaxing of lockdown measures. We dealt with the initial onslaught of the virus and resulting lockdowns; now we need to deal with the ensuing global recession. The road ahead will be challenging until we have a vaccine and clarity on future fiscal support. It is more important than ever that U.S. lawmakers agree to a second stimulus package to “avoid unnecessary hardship for households and businesses,” as Federal Reserve Chairman Jerome Powell pleaded recently. Unfortunately, pre-election politics are hampering a deal. Treasury Secretary Mnuchin and House Speaker Pelosi are making a last-ditch effort to get a second fiscal relief package passed. Talks have been in the $1.5T-$2.2T range, though doubts remain about whether a bill could pass before the November election. There is no question the quickly-approaching U.S. presidential election is poised to be one of the most contentious and consequential in recent history as the candidates’ world views and policy agendas are very different. (You can access our most recent article on the election here.)
Emerging markets led global markets in the third quarter, up 9.7%, as China’s economy displayed continued resiliency following its brush with Covid-19 earlier this year. The country is well positioned to weather the storm, and that is reflected in stock market performance – a great example of why it is important to have a globally diversified portfolio. U.S. large capitalization stocks returned 8.9% for the quarter as the Federal Reserve clearly stated that they expect interest rates to remain at zero until at least 2025. U.S. small capitalization stocks and foreign developed stocks also remained in the black for the quarter, with both indices gaining roughly 5%. U.S. bonds stayed flat for the period, following impressive performance in the first half of 2020.
As we mentioned in our recently published election piece, we expect a bumpy recovery in the fall and winter months. We anticipate the upcoming U.S. election will drive volatility prior to, and likely after, the election on November 3. Moreover, a larger global Covid-19 second wave may occur as people move indoors and are forced to come in closer contact with each other. We note that the 1918 Spanish Flu’s devasting second wave, which gripped Europe and the U.S. the winter following the initial spring outbreak, was the deadliest. However, we do see a light at the end of this tunnel. Once the market digests the outcome of the U.S. election and the agenda of the victors, and we are past the tumultuous winter months, investors will turn their attention to a vaccine, which could be broadly available to the public by mid-2021.
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