Fiduciary Trust International issued the following announcement on Oct. 7.

2020 has truly been an extraordinary year, perhaps the most unusual in our lifetimes. This is the first time that four transformational events—a recession, pandemic, mass protests and presidential election—have all occurred during the same year. Any one of these in isolation could cause market dislocations.

One sign of these uncertain days may be US economic growth. After a historic -31.4% plunge in the second quarter, expectations for third quarter US GDP are hovering around 30%. These are simply stunning numbers as economic growth typically registers in the low single digits.

To help our evaluation process, we have identified five dynamics that may impact financial markets over the next 12 months. This framework also helps our team position client portfolios in light of our expectations for the upcoming elections and beyond.

1. Economic and corporate fundamentals

Clearly, there’s been a sharp snapback in economic activity over a short period of time. While a positive sign, it has raised the question of whether this momentum will continue at this pace or slow. Consensus expectations suggest that company earnings will follow the economy’s path in 2021, which equity markets appear to have priced into valuations.

However, despite a positive trend in the labor market, we have some concerns. Unemployment has declined to 7.9%, but roughly 10 million fewer people are working than prior to the crisis. Many were thought to be temporarily laid off but have remained unemployed for months with little sign of being rehired. This has increased the chances these become permanent job losses and delay a bounce back.

Our expectation is that the economy will likely experience an uneven recovery as, although a number of sectors have rebounded, several haven’t.

2. Fiscal policy

We think that another stimulus effort is needed at this stage in the recovery. Chances of a relief package passing Congress may be increasing (perhaps even post-election) and we believe that a bill will eventually be agreed to. In our opinion, its implications are as important as the elections.

Should a deal be reached between Democrats and Republicans that ensures continued support for those most severely impacted by the shutdowns, our confidence in the economic recovery would be strengthened. However, to move markets we believe the fiscal stimulus impasse would have to shift toward the larger packages that have been proposed.

3. Monetary policy

There's an old adage that, for financial markets, it’s less important who the US president is and more important who the Federal Reserve chair is. Under Chair Powell, monetary policy has been largely stable and perhaps even predictable. Based on Fed guidance, our expectations are that the central bank will keep rates near 0% for several years.

Together with ample market liquidity provided by the Fed, these are probably the best financial conditions in decades. Hence, we believe that monetary policy will be supportive of markets for the near term.  

4. Coronavirus

While there has been some containment of the virus, along with business reopenings, the US is still not fully open and remains some distance from normalcy. With the president, first lady and many around them recently testing positive for the coronavirus, it has served as a reminder that it’s still a serious health issue.

Additionally, the US is entering its winter months. This has caused many experts to raise concerns about increased spread due to increased indoor gatherings and weakened immune systems. The trend in the virus has important implications for the economy. Markets seem to expect that a vaccine will be available within the next six months. If so, the US could be one step closer to returning to some version of a new normal.

5. Taxes

To combat the economic effects of the shutdowns and alongside the Fed’s supportive monetary policies, local and federal governments have borrowed a substantial amount of money. The combined impact of these efforts has led to rising debt levels.

At some point, perhaps as early as 2021, the trajectory for taxes looks likely to shift upwards.

Summing it up

We think that these five dynamics will extend past the elections and into 2021. Easy monetary policy, an improving economy, potential for additional fiscal support and hopefully improving containment of the virus should support markets. With this backdrop, we believe there is likely to be some volatility heading into yearend, especially given that our team views stocks as being nearly fully valued. Markets will likely trade in relatively tight ranges for some time. We remain cautiously optimistic and continue to evaluate the economic and political environments.

Original source: https://www.fiduciarytrust.com/insights/commentary?commentaryPath=templatedata/gw-content/commentary/data/en-us/en-us-ftci/market-commentary/oct-7-2020-election-webinar-summary-ron-sanchez&commentaryType=MARKET%20COMMENTARY