September 2020

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We enter the Fourth Quarter of 2020 hopeful that several lingering uncertainties will be resolved before the New Year.  These include potential vaccines for the coronavirus; the outcome of the US election; and the formal departure of the United Kingdom from the European Union, known as “Brexit”.  We expect the nature of the uncertainties will contribute to heightened volatility, and their resolutions could unsettle markets.  They should not, however, persist into the New Year.

There is global fixation on vaccine approvals, with several of the leading candidates expected to announce results in late October.  Optimism among investors is high that a vaccine could be approved on a limited or emergency basis before Thanksgiving.  We are concerned that vaccines are viewed as the panacea to immediately and permanently end the disruption from COVID-19 and that any disappointment in this regard could forestall the ongoing economic recovery.  There are daunting challenges with respect to vaccine manufacturing and distribution that need to be overcome, including ultra-cold chain logistics.  That said, the medical and scientific communities continue to make important progress on understanding and treating COVID-19.  This has manifested in improved mortality rates and an expanded standard of care that should continue to provide encouraging results.  Despite regional surges in cases, the health impact of the virus is now considerably more manageable than during the Spring.  We look forward to 2021 when the threat of COVID-19 and its impact on the economy should be much less pronounced.

Twenty years ago, on the day after the Presidential election, voters woke to a surprising and extremely rare situation – an unresolved election.  The S&P 500 suffered a near 12% correction until bottoming in mid-December once the election dispute was resolved.  There is a growing probability of a similar occurrence this year – i.e., results of the US election on November 3rd might not be determined for several weeks.  Mail-in ballots, partly in response to concerns regarding COVID-19, are estimated to be 2 – 3 times typical volumes, and rules vary by state as to when those ballots must be received and counted.  The volume and purported validity of mail-in ballots could, therefore, delay determination of the winner.  If the election outcome is delayed, we caution clients to anticipate elevated market volatility until resolution.  Fortunately, there are provisions in our Constitution to settle contested elections in relatively short order.  We expect the New Year will begin, as normal, with an Inauguration and a new session of Congress.

In a process that began in the Summer of 2016, the United Kingdom is on the verge of formally separating from the European Union.  Complicated by COVID-19, neither the UK nor the EU made progress this year toward negotiating an orderly exit.  Instead, there is a high probability of a “No Deal” or “Hard Brexit” – i.e., a departure without new trade agreements — on December 31, 2020.  We expect a Hard Brexit would create turmoil in the markets, particularly in foreign exchange as investors seek safe havens, such as the US Dollar and US Treasuries.  We further anticipate the impact on the US economy will be indirect, but we also acknowledge that forecasting the magnitude and extent of such an event is exceptionally difficult.  While the impact of Brexit will carry over into 2021 and markets will require time to adjust, we believe the US economy should be relatively insulated from extreme political uncertainty in Europe and the United Kingdom.

We are disappointed, yet not surprised, that Congress failed to enact additional fiscal support in the Third Quarter.  Numerous programs comprising early phases of COVID-19 “rescue” packages provided important and necessary support to the economy.  Most of those programs have expired, and it appears that economic recovery could stall without an additional package before yearend.  The markets, on the other hand, remain buoyed by enormous liquidity support from the Federal Reserve.  The Fed’s aggressive actions during the Spring should maintain low interest rates and support for equity valuations.