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2020 Midyear Market Outlook: Policy, Politics, and Populism
June 19 2020While the coronavirus crisis dominated the policy agenda in early 2020, investors will need to monitor a host of other risks—some potentially worsened by the pandemic—in the second half. These include rising tensions between the U.S. and China, social unrest, opposition to economic globalization, and U.S. elections scheduled in November.
Even before the coronavirus disrupted their operations, the ability of multinational firms to exploit global economies of scale was being challenged by protectionist pressure, Sharps notes. Now, after seeing the pandemic play havoc with supply chains, corporate managers themselves are likely to emphasize resilience over efficiency, even if it lowers profit margins.
- For corporate balance sheets, this new emphasis is likely to mean reduced leverage, higher liquidity, and more conservative financing practices.
- Share buyback programs, which have been a key support for equity prices in recent years, could be cut back.
- At the operating level, “near sourcing”—placement of production in or close to end‑user markets—could become a priority, rather than the search for the lowest‑cost labor markets.
...investors should expect more gradual recoveries in risk assets—not a continuation of the powerful rallies that lifted markets off their March lows...
The economic benefits are too compelling for globalization to go into reverse, Sharps contends. “But if you add in the ongoing trade tensions between the U.S. and China, a trend toward reevaluating global supply chains seems inevitable.”
Thomson says he is optimistic that the U.S. and China will step back from an escalation in their trade war, easing one potential threat to the global economic recovery. However, he predicts a longer‑term competition for dominance in key technology sectors is likely to produce continued friction between the two economic giants.
Hong Kong, China’s special administrative region, is caught in the middle of these tensions, Thomson says. However, while western critics decry Beijing’s efforts to push through a new security law for the city, Thomson predicts that China will not impose its legal framework directly on Hong Kong as that would threaten the city’s viability as a financial center.
The Pandemic Could Widen the Divide Between Wall Street and Main Street
(Fig. 4) U.S. Wages as Percent of GDP vs. U.S. Stock and Bond Returns
Past performance is not a reliable indicator of future performance.
January 1, 1950, through December 31, 2019.
Sources: FactSet, Standard & Poor’s, Bureau of Economic Analysis, Federal Reserve Board, Tax Policy Center, and Citizens for Tax Justice/Haver Analytics (see Additional Disclosures).
1 Equal‑weighted total return of U.S. equities (S&P 500 Index) and U.S.10‑year government bonds. Provided for illustrative purposes only. Not representative of an actual portfolio or investment. Index performance is for illustrative purposes only and is not indicative of any specific investment. Investors cannot invest directly in an index.
Economic Inequality Could Magnify Social Unrest
High unemployment, social distancing, and the digital divide between those able to work from home and those who’ve seen their incomes destroyed by the coronavirus all could worsen a long‑running shift toward income inequality in the U.S. and other developed countries.
Vaselkiv notes that the pandemic has been especially damaging for lower‑income workers in the service sector, many of them women and/or people of color. This has added to anger over racial injustice and claims of widespread police brutality that have prompted mass protests in many U.S. cities.
The upcoming U.S. election also poses risks for markets, Sharps warns. A victory by Democrat Joe Biden, he says, could lead to increases in both corporate and individual taxes, especially if the Democrats also take control of the Senate. Tighter regulation under a Biden administration could impose heavy compliance costs on energy, financials, and some manufacturing industries, Sharps adds.
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Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. Investing in technology stocks entails specific risks, including the potential for wide variations in performance and usually wide price swings, up and down. Technology companies can be affected by, among other things, intense competition, government regulation, earnings disappointments, dependency on patent protection and rapid obsolescence of products and services due to technological innovations or changing consumer preferences. Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall. Investments in high-yield bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets. All charts and tables are shown for illustrative purposes only.
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