• Investors appear to be growing more confident that the global economy will soon be emerging from recession and are optimistic over prospects of coronavirus treatments and vaccines.
• We agree that the world may be starting to climb back, but also think the economic reopening could be slower and more uneven than many expect.
• As a result, we think stocks and other risk assets could be subject to additional near-term risks.

Stocks reversed course last week, with the S&P 500 Index rising 3.3%.1 Investors were encouraged by progress with vaccine trials, indications that the Federal Reserve would remain accommodative for the foreseeable future and preliminary signs that economic growth was starting to recover. In a related reversal, areas of the market tied to improved economic growth outperformed more defensive areas, while value styles beat growth and momentum.1​

Ten Observations And Themes
1. Economic activity remains depressed, but should start to pick up. Investors seem to be largely looking past the dismal (and expected) data from April. Instead, they are focusing on possible improvement from economic reopening, pent-up consumer demand and massive monetary and fiscal stimulus.

2. We think May could mark the end of the shortest but deepest recession in a century. As the global economy slowly and unevenly unlocks, June data could show a reacceleration. Optimism over such prospects has allowed stocks to retrace so much of their March losses.

3. The Fed has been unequivocal about its ongoing support for the economy and credit markets. Stimulus measures and subsequent announcements by the Fed that it would support credit markets and promote liquidity have helped reduce corporate credit spreads since the equity-market low on March 23. This remains a positive for equity markets.

4. We anticipate another $1 trillion stimulus package to come in late June. Details need to be worked out, but we expect additional tax cuts, aid to state and local governments, unemployment benefit extensions and possibly some corporate liability protections.

5. Despite high volatility, stocks have barely moved over the past month. We are now three months past the anniversary of stocks’ all-time high on February 19.1 The first month was marked by a precipitous decline, the second by a strong recovery and the third by ongoing back-and-forth as investors await more clarity.1

6. Treasury yields have also been stuck. The 10-year yield has moved between a floor of 0.6% and a ceiling of 0.7% lately, despite the massive fiscal stimulus.1 We don’t expect a material move higher in yields in the near term. But as the economy continues to reopen, we anticipate a modest steepening of the curve and upward pressure on rates.

7. Inflation worries are growing. The huge run up in government debt, combined with massive central bank asset purchases, is causing investors to wonder about prospects for inflation. We don’t expect inflationary pressures any time soon, but the Fed may at some point decide that promoting higher inflation would be the least painful way to reduce high debt levels.

8. Similarly, we could eventually see pressures for higher tax rates. Current stimulus measures are effectively borrowing money from future taxpayers, and all of the spending will eventually need to be paid for. As a point of reference, we saw massive tax increases across income and capital gains rates in the 1930s to pay for the spending that helped the U.S. emerge from the Great Depression.

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