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Video

Top Market Risks to Watch for the Rest of 2020

Mark J. Vaselkiv, Chief Investment Officer, Fixed Income

Investors will run a gauntlet of major US event risks before year-end that could lead to enormous volatility. We expect at some point meaningful rotation in the major asset classes, and our asset allocation teams are looking to reduce our exposure to some of these risks by allocating more to international strategies.

Transcript

Investors will run a gauntlet of major event risks before year-end that could create enormous volatility in financial markets.

Currently, investors are focusing in on developments in Washington, D.C. You see obviously presidential and congressional elections fraught with uncertainty. That has become first and foremost in investors’ minds. We face the probability that we won’t know the results of the election on Nov. 3rd, 4th or 5th and it may drag on for quite some time leading to major impasses in leadership.

With the death of Ruth Bader Ginsburg that adds another level of complexity. Healthcare is clearly a major concern on investors’ minds. And the future of the affordable care act remains an open question. So her replacement may have significant bearing on what ultimately happens with Obama Care.

Her death also has taken the negotiations over phase four stimulus plans off the table, so that Congress, and specifically senators, can focus on confirming Ginsburg’s replacement. That creates some significant concern for states and local municipalities.

We may not see the results of a new fiscal plan until mid-2021 if there is a change in administration.

And finally, we look to what Washington will try to accomplish to get the pandemic under control. So Washington still has much work to be done to try and get the United States back on track.

The inevitability of a vaccine for COVID remains front and center as well. We have seen a number of large pharmaceutical companies make significant progress, but the commercial rollout of a vaccine remains an open question for investors.

This is a really critical component to the economic recovery. The markets are expecting resolution of the vaccine by mid-2021. But given the complexity of the drug itself, its transmission, keeping it 120 degrees below zero, there’s still a lot of questions. And so I think the markets could face significant disappointment if the rollout of the vaccine is delayed.

And finally, how many Americans will choose not to take the vaccine because of uncertainty over its efficacy?

The fiscal and monetary policy impulse necessary to keep the fragile recovery moving forward are a bit uncertain at this point. Washington has debated. Even the Fed has debated how much additional funding is necessary.

Chairman Powell as well as the leaders of large corporations across America are strongly advocating for additional fiscal stimulus. But that remains to be seen particularly if we experience a significant change in the administration in Washington from Republicans to Democrats, or if Trump is re-elected and the Republicans are able to maintain their control of the Senate it remains quite uncertain.

Text on screen: How Can Investors Seek to Mitigate These Risks?

We expect at some point meaningful rotation in the major asset classes, and our teams are beginning to evaluate how do we reposition ourselves from some of those strategies that have performed enormously well this year into beaten-up sectors not just on a value basis but also internationally as well.

It’s no secret now that other major developed countries have done a much better job getting the virus under control. We’ve seen Europe win that battle. China is now almost back to normal in terms of its economic activity.

Our asset allocation and macro teams are thinking carefully about reducing some of the risks that we’ve discussed in the United States by positioning more of our funds and rotating more into international strategies.

We like emerging markets. We like some of the developed markets as well.

And this might be a time when international begins to outperform the US. And part of that thesis will also revolve the US dollar as the lead currency around the world continuing to decline.

That should bode well for many of the countries in the world.

Morningstar Awards 2020©. Morningstar, Inc. All Rights Reserved. Awarded to T. Rowe Price for 2020 U.S. Morningstar Exemplary Stewardship and to Jerome Clark for 2020 U.S. Morningstar Outstanding Portfolio Manager, U.S.A.

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