As we enter the last quarter of 2020, we face some obstacles which threaten the road to recovery.
12.10.2020 | 14:26 Uhr
We are now within weeks of the US Presidential election, which could produce an even higher degree of uncertainty than usual, with the potential for a drawn-out resolution if the outcome is contested. In addition, the US Congress has not yet decided on a fiscal stimulus package to replace the expired programmes1 , which were helping to prop up the economy earlier in the year.
These matters could be resolved by the beginning of 2021, clearing the road for recovery to continue. However, near-term uncertainty could be a source of short term volatility. The September momentum break pushed equity valuations down moderately, but they still appear stretched. All of these point to the likelihood of a further correction and volatility.
US election uncertainty
It is possible that we will not see a clear election result immediately and were he to lose, President Trump has said that there are circumstances where he would not commit to a peaceful transition of power. If the results are in fact challenged or the process of confirming the winner is dragged out significantly, this could trigger market volatility.
Gridlock in Congress
Congress has been in gridlock over a fiscal stimulus package for some months now. However, as urgent as it was at the end of July when programmes expired, the timeframe is now even more limited. Recently, Jerome Powell, Chairman of the Federal Reserve, re-affirmed the Fed’s commitment to supporting the recovery1. However, testifying to the House Select Committee, he stressed the need for more fiscal stimulus. Despite this, if the Democrats and Republicans cannot confirm a deal soon, there is a real concern that there will be no package until after the election, which would be another blow to recovery in Q4. The Democrats are currently proposing a $2.2tn bill - an update of the Heroes Act, for which the House voted in favour on 1 October. The White House appears to be counter offering with a potential $1.6tn bill, though the details at the time of writing are not yet concrete. Evidently, the situation is dynamic and could change at any time.
Whilst we are focusing on the US in this note, stimulus from other governments across the globe is not forgotten. For instance, there are a number of updates to the EU’s Green Deal including details on the €750bn Recovery Fund, of which President von der Leyen would like to see 37% spent on European Green Deal objectives, with €225bn of the Fund to be raised through green bonds2.
Longer term there are reasons to be positive
In all, Q4 2020 has plenty of uncertainties likely to hinder growth in the short-term. At least one large US-based retail broker has increased their margin requirements and we view this as another indication that an increasing number of market participants foresee a period of volatility. However, looking at the longer-term, we believe most issues could be resolved by the beginning of 2021. Furthermore, there is still the potential for progress in tackling the virus from two angles, either through a vaccine and/or advancements in treatment.
Since our last note, we have not made any changes to our tactical positioning and retain a significantly below average exposure to equities. Moreover, towards the end of September, we moderately reduced exposure to risk assets, as part of our continual calibration of the portfolios we manage, to ensure we remain on track with respect to target volatility. We are “keeping our powder dry” to propel reinvestment once the volatility outlook improves.
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