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Vantage Point: The fear of fear itself

The Roman alphabet has outlived its usefulness – at least as far as labelling the economic recovery is concerned. Having spent six months talking about ‘V’, ‘U’, ‘W’, ‘L’ and even ‘K’-shaped paths, for this edition we have decided to ditch the letters and go back to a simpler classification. The course of the disease remains the single most important determinant of the kind of economic recovery we get, but we now think a simple ‘good’ or ‘bad’ classification covers everything we need to discuss. We cover this reassessment and its impact on markets and investment conclusions in our new Vantage Point.

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Weekly Market Roundup

November 23, 2020

Start your week off right with our market snapshot from the Global Economics and Investment Analysis Group.

WHAT HAPPENED

Global stocks (+0.6%) finished the week in the green. Emerging markets (+1.8%) outperformed developed markets (+0.5%).
In the US, all factors lost, except for small caps and momentum stocks. The S&P 500 underperformed (-0.7%) the Russell 2000 (+2.4%).
Credit spreads tightened, led by US HY (-13 bp). US Treasury yields were down (US 10-year finished at 0.82%; US 2-year at 0.16%).
Markets drivers for the week: Vaccine optimism remains elevated, a key component of the longstanding bullish narrative. Still, there are concerns about the economic damage before mass inoculation, particularly as coronavirus trends worsen and more restrictions are implemented. Worsening coronavirus trends in the US (NY Governor Cuomo warned NYC could go back to partial lockdown) and parts of Asia weighed on market sentiment.
US retail sales were 5.7% y/y in October, down slightly from 5.9% (highest YTD). The 0.3% m/m improvement was the lowest since April.
UK inflation gained slightly to 0.7% y/y but remains near a multi-year low.
Chief Brexit negotiators suspended direct talks after a member of the EU team tested positive for COVID-19, but officials continued working remotely to clinch an EU-UK trade deal that would come into force in just six weeks. UK's status-quo transition out of EU expires in 6 weeks.
Net assets of Chinese mutual funds surged 21% YTD end-September, despite Covid-19 disruption, growing faster than the rest of the world (vs. US +4%, Europe -0.9%). Foreign managers are shifting their focus to expand onshore to capture the rapid growth of China's mutual-fund industry.
Asian countries battling renewed flare up in coronavirus infections with South Korea and Japan reporting record daily increases.

WHAT'S AHEAD

US Markit PMI Manufacturing and Services (Monday)
Eurozone Markit PMI Manufacturing (Monday)
US Consumer Confidence (Tuesday)
US GDP 2nd Preliminary (Wednesday)
Germany Consumer Confidence (Thursday)

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Monthly Market Roundup

October 2020

Progress Continues, Risks Remain

Global stocks declined -3.2% in September, the first loss since March, bringing the YTD return to 1.8%.
Big tech and growth stocks, having led market performance YTD, led the fall. Risk-off sentiment helped drive safe-haven government bond yields lower and a 1.9% advance in the US dollar.
Global economic improvement continues but risks remain to the downside and further fiscal stimulus will likely be needed in the US.
A rise in Covid cases in certain areas around the world is a cause for concern, but it is too soon to gauge the potential economic impact, as full lockdowns seen in March and April will likely not be utilized again.
Signs of slowing labor market progress and rising structural unemployment remain a key risk.

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September 2020

Global stocks gained further in August and returned 6.2%, the best August in 32 years, bringing the YTD performance to 5.1% after surpassing the prior February peak.

Back to New Highs
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August 2020

Global stocks gained 5.3% in July bringing the YTD loss to only -1.0%.

Stocks Gain Despite Signs of Slowing Recovery
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Points of View

What’s priced into markets?

Inflation: Is It Coming Back?

Probably not in a big way, but if it were to it would change the investment landscape completely.

Interest Rates

Short term interest rates reached all-time lows in the US in May, rebounding only marginally since then. At face value, markets appear to be pricing in a significant probability of negative rates in the US. We see this scenario as unlikely.