Overview: Global stocks were up last week in volatile trade as equities were led by emerging markets (MSCI EM), up 2.2%, and international developed stocks (MSCI EAFE), which finished 1.6% higher on the week. In the U.S., stocks vacillated on headline news, including the first presidential debate, ongoing fiscal stimulus talks, and President Trump testing positive for coronavirus. The S&P 500 index ended the week up 1.5%. In virus news, fears around increased contagion were counteracted by a stronger U.S. macro backdrop. A declining unemployment rate, expanding manufacturing activity, and strong consumer spending data helped fuel positive sentiment for the week. U.S. Treasury yields continued to trade in a tight range, with the 10-year Treasury ending the week at a yield of 0.69%.
In economic news, last month’s U.S. unemployment rate fell for the fifth month in a row to 7.9%, from 8.4% the month before. A broader unemployment rate including discouraged workers and those working part-time also fell to 12.8%, from 14.2% in August. Inflation still remains muted, as the U.S. Core PCE index (the Federal Reserve’s preferred inflation measure) edged higher to 1.6% for August, above its 1.4% level in July.
Looking forward to the final quarter of 2020: (commentary from JP Morgan) As we enter the fourth quarter, investors may find themselves optimistic about the prospects for economic growth after what will likely be an impressive rebound in gross domestic product (GDP) in the third. Following a historic 31.4% quarter over quarter contraction in the second quarter, data suggests the third quarter will likely see an equally impressive 35% quarter over quarter gain. While visually this may appear to be a “V”-shaped recovery, investors should recognize that the continuing effects of the pandemic and indecision on fiscal stimulus from Washington will likely cause growth to moderate into 2021. As evidenced last week, the unemployment rate still remains elevated, personal incomes fell 2.7% in August as a result of the lapse in federal unemployment insurance benefits and manufacturing activity has moderated after rebounding strongly. Altogether, growth should moderate to roughly 2-3% through the first half of 2021. If our third quarter 2020 estimate is realized, it would still leave the level of third-quarter real GDP about 4.2% below the pre-COVID-19 trend and about 3.1% below the level of GDP in fourth-quarter 2019. To put it in context, the financial crisis resulted in a 4.0% decline in GDP, highlighting the magnitude of the last recession. It still looks like 2021 will be a year of recovery for the economy, albeit a modest one until the distribution of a vaccine.
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