With the precipitous drop in U.S. GDP and the effects of monetary and fiscal interventions, the rest of third quarter may be a moment for investors to take a breather.
Each week, Chief Cross-Asset Strategist Andrew Sheets, or a member of his team, offers perspective on the forces shaping the markets as well as insights on investment opportunities and risk across global asset classes.
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Welcome to Thoughts on the Market. I’m Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I’ll be talking about trends across the global investment landscape, and how we put those ideas together. Its Friday, July 31st, at 2pm in London.
In the 2nd quarter of 2020, the US economy shrank by 9.5%. That was the largest quarterly decline on record, and it was so by some margin. Previously, the worst quarter for the economy had been a 2.6% decline way back in 1958. And in the teeth of the financial crisis, the 4th quarter of 2008, the economy shrank by 2.2%. So this recent decline, is more than three times worse than either of those episodes, and means that the current recession has now wiped out all of the growth in the US economy since 2014.
The good news is that we think the worst of this recession is now behind us, and that the economy is growing again. Indeed, my colleague Ellen Zentner, Morgan Stanley’s Chief US Economists, thinks that growth in the 3rd Quarter may register at one of the strongest levels on record, helped in part but just how low the current starting point is.
But August and September still present a number of challenges. Importantly, we think several recent developments could give investors pause, and create an incentive to keep more money on the side-lines.
First, any economic recovery from this recession is going to be very closely linked to the spread of COVID-19, and here our projections here are getting worse, not better. Initial progress on a vaccine has been promising, but key data for phase III trials may not be available until October or November. For more on those worsening projections, as well as the race to find a vaccine, please see our earlier episode where I chat with my colleague Matthew Harrison.
The second issue is fiscal support. As bad as this recession is, it would have been much worse without an incredible level of spending by the federal government. But that spending is now starting to run out, and a new support plan is proving slow to materialize.
Finally, there are central banks. While the Federal Government has been spending trillions to prop up the economy, the Federal Reserve has been buying trillions of assets to support financial markets. That’s aided the economy recovery and prevented a larger shock to borrowers, but it’s also resulted in very high valuations in the equity market and elsewhere.
At its meeting this this week, the Federal Reserve suggested they were comfortable with their current policy for the time being. But that reduces the chance that there’s a positive surprise from the Fed until their next meeting in mid-September, and might remove one reason why investors have been sticking around, despite the current high prices.
For all those reasons, from the increasing spread of COVID, to the lack of progress on US fiscal policy, to the fact that the Fed may be on hold for a little while, we believe that August through September presents a more challenging period for financial markets. We think it will be a pause that refreshes, as we think this economic recovery will ultimately be sustainable, and that markets can resume a march higher when some of these issues are behind us. We simply think that investors will have a better opportunity to do so a little later in the year.
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