• The near-term risks we have been talking about for months may have finally caught up with financial markets.
• Looking ahead, we think stock prices will be driven by coronavirus news and more uneven economic data than we saw in the earlier part of the expansion. This could create additional headwinds for equities.
• Over the longer term, however, we think a new fiscal stimulus package early next year and an eventual effective vaccine will create a path for improving stock prices.

Stocks sold off sharply last week, experiencing their worst week since the beginning of the coronavirus crisis in March. Investors reacted negatively to news of increasing cases in the U.S. and Europe, fading hopes for near-term fiscal stimulus and growing election-related uncertainties. All sectors were down for the week, with the worst declines in industrials, technology and consumer discretionary.​

Ten Observations And Themes
1. New waves of coronavirus cases are likely to negatively impact economic growth. We are already seeing reversals of reopening efforts throughout Europe. And rising caseloads in the U.S. are starting to limit economic activity. The only silver lining is that mortality rates have been falling. We expect medical advancements will allow for more economic activity over the course of 2021.

2. The economic recovery will likely tail off in the coming months. While the third quarter annualized GDP increase of 33.1% is impressive, the U.S. economy is still 3.5% smaller than at the end of 2019. And with coronavirus cases rising sharply and scant prospects for new fiscal stimulus before next year, further economic progress will likely be limited. At this point, we expect fourth quarter GDP up only around 4%.

3. Strong consumer confidence remains an economic bright spot. Personal income and consumption spending in September were both stronger than expected. And the savings level dipped as well, showing people are still willing to spend.

4. In response to slowing growth and rising virus caseloads, the European Central Bank is likely to engage in additional easing in December. This would put further downward pressure on the euro.

5. Corporate earnings have been much better (meaning less worse) than expected. With three quarters of S&P 500 companies reporting, 80% have beaten expectations by an average of nearly 20%. At this point, earnings are on track to only be down 11% for the quarter.

6. We could see a fiscal stimulus package shortly after the election, but chances are greater for early 2021. The size and scope of any new spending package will be driven by election results. If we see something sooner rather than later, it would likely be a smaller and more limited spending bill, such as the $500 billion package that Senate Republicans passed.

7. We think Treasury yields will continue to inch higher. The 10-year yield rose 20 basis points in October on expectations of better growth and a sizable fiscal stimulus package next year, as well as indications of modest inflation and a huge supply of Treasury issues. We think these factors could push rates toward 1% by the end of this year and higher in 2021.

8. It seems more likely that taxes will increase next year. If current polls hold true, Joe Biden will win the presidency and the Democrats will take over the Senate. Should that happen, we expect tax rates to rise notably and regulatory scrutiny to increase. This would likely create headwinds for stocks in the coming years.

9. A more uneven economy could trip up stock prices. The recovery is moving from its earlier V-shape to something more choppy. We expect the economy to continue growing in the coming quarters, but a less strong acceleration presents risks to equity markets.

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