US market outlook

There are endless forecast comments in relation to the US economy recovery path, characterized by a myriad of well-know letter representations, including V-shaped, U-shaped, W-shaped, L-shaped, etc. Despite the general perception that markets are disconnected from economic fundamentals, it could be argued that US economy is actually catching up in terms of unemployment levels, business activity, general demand (consumption), favourable currency value, investments crude prices stabilizing (but still favourable to gradually returning commercial demand), etc. This could imply a rather quick economic recovery (probably by the end of the year), especially if the Fed stick to their current monetary policy (probably not so much on the asset buying, but rather the interest rate side of it) and Congress extends the successful fiscal support measures implemented so far, including business bailout funds and household support. The upcoming US election, however, provides a fairly high level of uncertainty with regard to fiscal policy and markets performance, especially with the Democratic presidential candidate gaining momentum in the preliminary polls. The two candidates have very divergent policy strategy with regard to taxation and business regulations, efficient financial markets operation, pandemic support, healthcare, level of government intervention, environmental regulations, labour force and most of all foreign policy. Thus, the details (and levels of populism) around the policy platforms of both candidates will be followed closely in the months to come, as these are yet to be priced in by the markets, and more detailed analysis of the potential impacts will surely be performed. So investors need to be particularly careful in analysing and picking their asset classes, specific assets, industries and regions for their portfolio diversification strategies.
Generally, markets seem quite immune to economic data, which is obviously attributed mainly to the fact that the Fed’s monetary and Congress’ fiscal policies are providing investors with sufficient reassurances that no matter what markets will be protected – for this confidence build-up to remain strong, of course, both fiscal and monetary stimulus should remain in place (to at least some extent) until the economy catches up, but politics is a strange beast (especially in election years) and what seems logical may not always be the actual outcome at the end. Of course, the majority of the tech sector is over-achieving, regardless of monetary and fiscal stimulus, in line with recent shifts in consumer and commercial needs, which trend is most likely to persist in the post-pandemic era. Speaking of which, one of the main factors that swings market sentiment at the moment is the COVID-19 pandemic and its development. Of course, if the economic fundamentals do not (more or less) catch up by the end of the year, the optimistic vibe currently dominating the markets will die out and the economy-markets disconnect could end up crystalizing into a bear market.
Another interesting market phenomenon at the moment is related to the wave of social and environmental activism on US and global scale, which is driving market performance of ESG shares. Going forward, it will be interesting to follow and analyse the effects of the pandemic and the unravelling foreign relations (geopolitical balances) on different business models and supply chains. Surely, to some extent, operations (originating in the US and Europe) outsourced to Asia, Africa and even South America will be gradually retracted back home in line with deglobalization trends and national security concerns, ongoing business automation efforts, low energy costs, supply chain resilience needs, as well as reduced cost (mainly labour) differentials between developed and developing countries. This will obviously impact the global economy, all economic agents and the financial markets profoundly – the market will have to revaluate (price in) the new fundamentals of all affected parties: from cost and capital structures, through revenue generating capabilities and future earnings expectations, all the way to market sentiment regarding the new normal. Macroeconomic fundamentals of developed countries will also shift, with GDP (for instance) being less reliant on household consumption and more dependent on business investment (and of course government spending).
We believe market optimism is a bit unhinged and unfounded, with caution flying out of the window – economic fundamentals should not be ignored and the fact that debt and equity markets are effectively on life support for the time being (administered via fiscal and monetary stimulus) should most definitely be taken into consideration when making investment decisions. Recovery will most likely be gradual, potentially volatile (with future lockdowns on the cards) and will be tightly linked to the global progression of the pandemic. Seeking long market opportunities should not be the main focus of investors, but rather protecting against the downside risks in line with the fact that equity and credit market conditions could deteriorate easily, despite the reserve bank support and business fiscal stimulus. Furthermore, portfolio diversification should not be ignored, even though high-quality bond yields are below inflation expectations in some cases. Corporate credit offers interesting opportunities, but careful fundamentals consideration (including bond duration) and sector-screening process should be in place for when sifting through the piles of corporate bonds being issued out there at the moment – as usual, investment-grade should not be overlooked in favour of high-yield overweight positions in the search for better yield balance. Investors should not get carried away with growth stocks’ momentum provoked by Fed support and low inflation environment – geographical diversification and value investing principles should not be ignored, especially with inflation expectations gradually rising. Quality dividend-yielding and/or defence stocks should (now more than ever) be considered. In line with current and potential future volatility, longer-term investing strategies might be more successful than the fast-money approach.
The economy will recover gradually and investors should be patient and exercise caution in building their portfolios. Pandemic developments and shifts in bailout and support policy will be driving the markets in the next 6-12 months. Economic fundamentals should not be ignored and downside protection should always be in place, especially in this volatile times and despite attractive momentum swings.

This is not a financial advice to buy or sell assets. Investing in financial assets carries risks and could lead to financial loses.