Q4 2020 Economic & Market Outlook

Executive Summary

The U.S. economy has continued to recover from the depths reached during the COVID-19 shutdowns. The “easy” gains may have been made as we’ve transitioned from shutdowns and stay-at-home orders to resuming many normal activities. However, a complete recovery is unlikely until the pandemic is fully contained. Encouraging news on vaccine progress and treatment options provides hope that 2021 will be a better year.

Asset prices continued to recover during the third quarter of 2020 despite the near-term uncertainty surrounding the election, the timing of a potential phase four stimulus deal, and the recent uptick in COVID-19 cases. Year-to-date returns remain mixed with growth stocks continuing to dominate performance.

The recovery remains fragile and the delay in enacting a phase-four stimulus package adds some risk that additional businesses may falter. Given the uncertain environment, we have positioned portfolios with a moderately conservative posture as we look for attractive entry points to build positions in long-term investment opportunities.

• Cash – money market balances are being kept at lower-than-normal levels given near-zero yields
• Equity – slightly underweight due to near-term uncertainties; looking to add on weakness
• Fixed Income – low rates are unattractive long term, though we are finding value in some credit sectors
• Complements – adding where appropriate

2020 Election

• Volatility may increase as the outcome of the election is determined, but it is the shifts in economic fundamentals that will be the ultimate driver of financial market performance.
• A Biden presidency could mean higher taxes, but also more economic stimulus.
• The economy and financial markets have proven to be resilient regardless of which party is in the White House or in control of Congress. Politics should not overly influence long-term investment decisions.

Economic Outlook

• The U.S. economic recovery has made solid progress over the past three months, though it will likely take until the end of 2021 until we reach pre-COVID levels of GDP.
• The significant amount of stimulus that has been injected into the economy has provided the support needed to keep our economy functioning. A new round of phase-four stimulus measures is being negotiated, which could further aid the most vulnerable parts of the economy.
• The U.S. Federal Reserve continues to show that it is willing to use all available tools to support growth.

U.S. Equity Outlook

• Stock market gains were once again led by large-capitalization growth stocks, putting valuation levels for this segment of the market near their highest level in 15 years.
• Corporate profits have generally been better than expected as companies have found ways to cut costs and adjust to the new COVID-impacted operating environment faster than expected.
• Valuation levels are currently at above-average levels; historically, this has resulted in below-average returns over the next 5-10 years.

U.S. Fixed Income Outlook

• Short-term interest rates are expected to remain near zero for the foreseeable future. Historically, the Fed has sought to raise interest rates preemptively when inflation approached its 2% target. A change in policy now allows for inflation to moderately exceed that target before the Fed raises rates.
• The Fed’s emergency lending facilities have had only modest usage in recent months as credit markets have been well-functioning. With plenty of dry powder left in these facilities, the Fed has the capacity to re-enter markets if needed.
• Yields on high-quality U.S corporate bonds will likely remain low for the foreseeable future; we are finding pockets of opportunity in higher yielding sectors where we believe investors are being well-compensated for the risk taken.

ABOUT THE AUTHOR

Brian Andrew

Chief Investment Officer | Johnson Financial Group

As Chief Investment Officer, Brian Andrew leads Johnson Financial Group's investment strategy to provide consistent, actionable investment solutions for our clients.