October can be a dangerous month for stocks, but half-way through the month stocks have barely flinched. Meanwhile, parts of the economy like manufacturing and housing are enjoying a V-shaped recovery.
As we enter the final quarter of the year, economic momentum has slowed from its summer peak. But we’re optimistic that the recovery will remain intact, although the road ahead is littered with potholes.
For instance, signs are growing of a slowing in the job market with companies announcing major layoffs due to lack of demand. And in the public sector, layoffs have begun by state and local governments due to budget shortfalls.
Unemployment remains stubbornly high, with millions of Americans out of work. While government relief for those most effected is bogged down in political fighting and election-year politics. At this point, it seems unlikely that any help from Washington D.C. will happen before January.
Finally, as colder weather sets in, along with evidence of a resurging pandemic, industries like restaurants and travel remain extremely vulnerable.
But not all economic data is negative. Service sectors, which inherently rely on customer interaction are struggling, but other sectors like manufacturing, housing and retail sales are experiencing a strong rebound. And based on global business surveys, business leaders today are more confident in their outlook compared to earlier this year.
4th Quarter Good for Stocks
It’s said that the market hates uncertainty, but despite the problems facing the economy, the stock market continues to climb a wall-of-worry.
Only a month ago, we were expressing concern that the market’s strength was being fueled only by a handful a mega-cap tech stocks. Since then, the broader market has come to life.
Following the September pullback, small and mid-sized company stocks have been outperforming the large-cap S&P 500 index. This broadening of performance gives us confidence in the overall health of the stock market, as it is no longer just a story of big-tech.
Historically, the 4th quarter has been kind to stocks. Given that the market has made it through the volatile months of September and October relatively unharmed, we think the market’s strength could well propel it through the end of the year and into 2021.
Emerging Market Strength
The manufacturing sector across the globe (not just in the U.S.) is surging while the service sector lags. Emerging markets economies like China are dominated by manufacturing. And evidence is suggesting that the emerging markets have taken the lead in the global manufacturing recovery.
Emerging market stocks have lagged the U.S. market for more than a decade. But with attractive valuations, and a much smaller reliance on the service sectors compared to the U.S., we think emerging markets may be poised for outperformance.