07.10.2020 14:20

Market Outlook: Hopes of new relief package dashed

Donald Trump's positive COVID-19 test overshadowed most other news this past week. When the US president was transported to a hospital on October 2, stock markets fell. When he returned to the White House on October 5 they rose again, among other things amid hopes of a new federal relief package, but also in response to various corporate acquisition announcements. Slightly more positive signals also emerged from Brexit talks (on a trade agreement between the United Kingdom and the European Union), though the EU's chief negotiator says many issues remain unresolved. Global stock markets, as measured by the MSCI World Index in US dollars, rose by 1.2% this past week.

Hopes of new US fiscal stimulus deal are dashed by Trump

Financial markets dislike uncertainty, so the question of how long Donald Trump might be side-lined by illness worsened the outlook for a new fiscal stimulus deal. This was one reason why stock markets lost ground. Before returning to his "home office", the president himself urged Congress to reach an agreement. Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi resumed their talks, with Democrats calling for USD 2.2 trillion worth of stimulus measures, while Republicans offered USD 1.6 trillion.

But Trump put a sudden and unexpected end to these hopes yesterday local time (October 6) when he tweeted, "I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Business." He called on the Senate to instead concentrate on quickly confirming his US Supreme Court nominee, Amy Coney Barrett. Immediately after the president's announcement, US equity indices fell – with the broad S&P 500 index closing down 1.3% for the day.
The talks had reflected the desire of both parties to signal their good intentions to voters, but our main scenario for some time has been that any new federal relief package will materialise only after the November 3 elections.
Later today, October 7 (early October 8 Central European Time) vice presidential candidates Kamala Harris and Mike Pence will meet in Utah for their only pre-election debate.

New American jobs, but slower pace of recovery

Among macroeconomic news from the United States in the past week were labour market figures showing that 661,000 new jobs had been created in September – fewer than expected – but that unemployment nevertheless fell from 8.4 to 7.9%. This was an encouraging outcome for those wanting to show there has been progress, but the pace of improvement has slowed. Only half of all jobs lost since the beginning of the pandemic have been recovered.

Better corporate report season ahead?

On both October 5 and 6, the Swedish stock market reached all-time highs, according to the broad OMXSPI index, beating the previous record that had been set on February 19. A number of listed companies have issued "reverse profit warnings", indicating that their third quarter earnings may actually turn out better than earlier forecasts.
Surprisingly upbeat signals from many companies − especially in Sweden and other Nordic countries − reflect the difficulty of making forecasts nowadays but also suggest that the trend during the second quarter towards better-than-expected corporate earnings, due to cost-cutting, is probably intact. If Q3 reports as a whole confirm the same positive scenario, this should provide continued support for share prices, all else being equal.

Our market view

After several turbulent weeks, the stock market situation has improved a bit. This is despite uncertainty created by the effects of new coronavirus outbreaks, a levelling out of economic growth statistics, the US elections and the ongoing Brexit negotiations.

Among positive market drivers, we see that the world economy is in the midst of recovery, governments and central banks are providing stimulus measures, while interest rates and bond yields remain record-low. We expect new COVID-19 outbreaks to be met by "smart" lockdowns and believe that any signs of weakness in economic growth will be met by new stimulus packages.

Although the stock market can hardly climb as quickly as this past summer, and although valuations are high in a historical perspective, we foresee continued good growth that may lead to higher share prices well into 2021.

Given the surge in stock market indices since March, our bright outlook is already largely priced in. This makes the market more sensitive to negative news. The fast-approaching US elections and worrisome signals about the spread of COVID-19 are probably the biggest threats at present.

But there are good arguments for accepting higher valuations, especially low interest rates and yields along with major stimulus packages, which suggest continued good growth. Looking ahead, though, this will reasonably require that corporate reports for the third quarter of 2020 at least turn out to be in line with expectations. If corporate executives signal a gradual improvement in demand during the quarter, that would be a clear sign of strength.
We expect a more normal stock market pattern ahead after the vigorous recovery, but we are sticking to our recommendation of an overweight in equities and other risk assets such as corporate bonds in the high yield segment.