• Stocks are down four weeks in a row, and weakness from the technology sector has spread to the broader market.
• We continue to think there is at best a small chance for an additional fiscal stimulus package before the November elections.
• Stocks appear balanced between positives and negatives. And growing uncertainty over the U.S. election is weighing on investors. As such, we think equity markets could be choppy and range-bound through the end of this year.

Stocks fell again last week, marking the first time in over a year that markets declined for four consecutive weeks.1 The main culprit appears to be fading prospects for a new fiscal stimulus package in the U.S., even as Federal Reserve officials and others continue to call for new spending. Growing concern over U.S. election uncertainty also contributed to the decline, as did new surges in coronavirus cases, particularly in Europe.​

10 Observations And Themes
1. Rising coronavirus cases around the world present a growing market risk, as they are raising the odds of additional economic containment.

2. The lack of a new fiscal stimulus package is hurting the U.S. economy. We continue to believe that a new stimulus package before the election has only a small chance of happening. Without one, consumer spending would likely take a hit and millions of individuals and thousands of businesses could face bankruptcy risks.

3. U.S. political uncertainty is rising. In addition to the usual election year uncertainty over potential shifts in leadership, confusion is running high over how voting will actually work, whether we will have a clear winner and whether either side will concede defeat. This uncertainty could persist for days or weeks after the election, and financial markets notoriously loathe political uncertainty.

4. Economic data is increasingly mixed as the recovery becomes choppier. On the negative side, initial weekly unemployment claims remain elevated. On the positive side, new home sales are climbing rapidly.

5. The surge in the housing market reflects pandemic-induced demographic trends. As virus cases continue to rise and millions are finding it difficult to leave their homes, many people are increasingly looking for new housing in suburbs and rural areas.

6. The corporate earnings outlook is mixed. Individual company-level forecasts imply that S&P 500 earnings could recover by the end of the year.2 But that masks significant variation beneath the surface. Three-quarters of the year-over-year decline in second quarter earnings came from sectors directly hit by the pandemic, including travel, energy and loan-loss provisions in banks.2 And forecasts are not suggesting recoveries in those areas. Rather, the good news is focused on technology and health care, which didn’t take much of a hit to begin with.2

7. Prospects for (eventually) rising inflation are causing many to wonder if any areas of the market could benefit from such a trend. We would point to the traditional historical winners: small caps, bank, energy and industrial stocks, gold, short-duration corporate credit, TIPS, leveraged loans and convertibles.

8. The bear case for stocks: Markets may not be able to overcome significant headwinds, including a resurgence in infection rates, negative economic surprises and prospects for higher corporate tax rates next year.

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