On the latest edition of Market Week in Review, Senior Portfolio Manager Megan Roach and Senior Client Investment Analyst Chris Kyle discussed key economic data releases from the U.S. and Europe, the latest on potential U.S. fiscal stimulus and the market response to rising COVID-19 infections in parts of the world.
U.S. services sector continues to expand, September ISM report shows
Economic data released the week of Oct. 5 came in fairly positive in both Europe and the U.S., Roach said. In the eurozone, retail sales and business activity expanded during September, beating consensus expectations in the process. Meanwhile, in the U.S., the Institute for Supply Management’s (ISM) services index rose for the fourth straight month, to a level of 57.8 in September. Any reading greater than 50 is an indication of expansion, Roach noted.
“The most positive sub-indicator within this survey was employment, which climbed above 50 for the first time since February. This means that on the whole, for the first time in six months, companies in the services sector are hiring more workers than they’re laying off,” she explained. This is of particular significance to the health of the U.S. economy, Roach said, because approximately eight out of 10 American workers are employed by the services industry.
However, she cautioned that not all areas within the sector are reaping the benefits of the economic recovery. “In particular, several airline and entertainment companies have announced they may be forced to make more permanent job cuts unless additional government aid is provided soon,” Roach said.
Markets whipsaw over potential for U.S. fiscal stimulus
Broadening the conversation to the status of potential U.S. aid, Roach noted that this was the primary driver of market volatility the week of Oct. 5. “Nearly every day, there was whiplash in markets over whether Congress was likely to put together a large-scale stimulus package, a piecemeal deal for certain beleaguered sectors like the airlines, or no deal at all,” she explained.
Roach noted that at a virtual speech before the National Association for Business Economics on Oct. 6, Federal Reserve Chairman Jerome Powell urged Congress to provide additional fiscal stimulus. “Powell stated that the economic recovery will be stronger and faster if monetary and fiscal policy continue to work side by side-and even went so far to say it would be better for Congress to provide too much stimulus than not enough,” she stated.
As for the latest status on potential stimulus, Roach remarked that the pendulum appears to have swung back toward prospects of a more comprehensive package, with reports that the U.S. presidential administration will soon propose a $1.8 trillion coronavirus relief package.
U.S. cyclical stocks power market rally
As the U.S. and Europe move further into the fall, there are signs that COVID-19 cases are escalating back toward levels seen during the spring and summer, Roach said. Nine states in the U.S. logged record case increases the week of Oct. 5, she noted, with Germany, France, Italy and the UK also all reporting spikes in infections.
“This is prompting the possibility that governments may reinstate previously relaxed restrictions, which would certainly be a risk for markets – yet markets haven’t reacted much to this lately,” Roach said. In fact, global equity markets rose approximately 2% the week of Oct. 5 – as of midday Pacific time on Oct. 9-buoyed by smaller cap cyclical stocks in the U.S., which climbed roughly 7%. The energy, materials and industrials sectors were all strong performers the week of Oct. 5, Roach noted, with the risk-on environment also leading to a weakening in the U.S. dollar.
So, what does the road ahead look like for global markets and economies? Roach noted that Russell Investments recently released its quarterly market outlook, which focuses on the firm’s investing pillars of cycle, valuation and sentiment. For global equities, the firm’s strategists see the business cycle as supportive, valuations as slightly expensive and sentiment as neutral.
“In a nutshell, this leaves us neutral to our long-term strategic asset allocation in the near-term, but moderately positive for equities over the medium term, especially once we get past the uncertainty of the U.S. elections and move closer to a COVID-19 vaccine,” she concluded.
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