Market Monitor: October Mid-Month Update
Headlines and Highlights
- IMF says global outlook has improved: The global economy is shrinking significantly this year because of the coronavirus pandemic but less severely than was projected just a few months ago, a report by the International Monetary Fund said. The IMF now forecasts a 4.4% pullback this year, up from its June estimate of a 5.2% drop, citing ramped-up testing, improving treatments and vaccine trials that are proceeding at an unprecedented pace. U.S. GDP is seen as contracting 4.3% in 2020, an improvement from the 8% plunge predicted in June.
- Stimulus package in limbo: Chances appeared to fade for a U.S. fiscal stimulus package winning approval before November 3rd elections, with talks involving the White House and congressional leaders stalled and proposed totals ranging from $500 million to $1.8 trillion or more. Investors appear to remain optimistic a deal will get done eventually; major U.S. and international stock benchmarks rose by 3% or more in the first half of October.
- Small caps become U.S. market leaders; value stocks rising: After lagging large caps throughout the pandemic, smaller stocks have been on a run in September and October, gaining 12% in three weeks versus 7% for the S&P 500. Value stocks also have risen steadily, keeping pace with formerly dominant growth stocks since last month’s tech slide, due in part to hopes for future stimulus and a path toward full economic recovery.
Chart of Interest
Catching up: Smaller companies’ stocks have performed well this fall and are nearing break-even for 2020 after erasing most of their 41% slide from February and March.
Sources: Altair Advisers, Morningstar
- U.S. GDP for the just-concluded quarter is estimated at an eye-opening annualized rate of 25%, according to a blend of forecasts by the Atlanta and New York Federal Reserve Banks, but is predicted to slow to under 5% in the fourth quarter. The second quarter saw the economy shrink at a historic 31.7% annual pace.
- The biggest challenge facing the economic recovery continues to be a resurgence of the coronavirus, with Europe hit by a new wave and U.S. case numbers accelerating. Reports of new cases are trending higher in 41 states this month, including 17 that are experiencing their biggest infection numbers of the nearly year-long pandemic.
- China’s economy has emerged from its early experience with a coronavirus lockdown as the only major country expected to log growth for all of 2020. The IMF estimated this week that Chinese real GDP will expand by 1.9% this year, compared with declines of 8.3% for the eurozone and 5.3% for Japan.
- Polling three weeks before the elections shows a growing chance of a Democratic “blue wave” – capturing majorities in both houses of Congress along with the White House. That outcome would be expected to result in higher spending and higher taxes, a mixed picture for investors. Markets historically have ultimately shrugged off volatility to perform well after elections.
- The U.S. government budget deficit more than tripled to $3.13 trillion in fiscal 2020 as the result of huge outlays for coronavirus relief, according to Treasury Department data. The 45% jump in spending ballooned the federal debt to $21 trillion at the end of September, or an estimated 102% of GDP – exceeding the size of the economy for the first time in over 70 years.
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