Economic Risks Rising
Although the medical risks are looking better, the economic damage has continued to mount. Job growth dropped significantly again last month, and consumer confidence remains well below post-pandemic highs. Beyond the pandemic, the expiration of federal subsidy and protection programs is also weighing on sentiment. There are also signs that lower confidence is starting to translate into weaker spending growth, which will be a headwind going forward. Overall, the economy remains open and growth continues, but the risks—especially on the consumer side—are rising.

Future Volatility Likely for Financial Markets
And those rising risks are being reflected in financial markets, which pulled back a bit in the last month before largely recovering. As the rebound suggests, the underlying momentum remains strong, and markets are still supported by low interest rates and expected strong earnings growth. But future volatility remains likely through the end of the year. Whether this rebound continues will be one of the key things to watch in the coming weeks.

Upside Ahead?
We have seen the medical risks potentially top out in the past several weeks as infection growth has continued to moderate. Despite that improvement, the economy has continued to react to the earlier case growth, especially on the consumer side, and this has raised the economic risks and put markets on the defensive. So far, though, the country remains open and the economy is growing. While risks are rising, that will likely continue unless medical conditions get much worse. Markets are cautious, but fundamentals still remain favorable. Volatility is very possible, but there may well be more upside ahead.

Brad McMillan is chief investment officer for Commonwealth Financial Network.

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