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Markets are enjoying a period of relative calm, but investors should prepare for a volatility burst as the U.S. heads toward the 2020 presidential election and while the economy is still dealing with the disastrous effects of the coronavirus pandemic, says Scott Minerd of Guggenheim Partners.
“The market’s performance and the economy’s recovery is calm compared to the volatility of March and April, but several issues concern me as the eyewall approaches,” Minerd writes in a note set to be published later Thursday but reviewed by MarketWatch.
The prominent investment manager says that trillions in funds doled out by the Federal Reserve and the government directly have helped to paper over some of the big financial problems created by the COVID-19 pandemic, but he says that uncertainties for market participants abound.
Minerd pointed to the protracted and so-far unsuccessful, talks on providing additional coronavirus relief to American workers and businesses, small and large, still reeling from the shocks of the public health disaster.
Calls for further aid come as case counts of COVID-19 are rising anew throughout the globe, with both Germany and France seeing record infections, forcing parts of Europe reinstitute lockdown measures.
“Without fiscal stimulus, personal income will stagnate, job gains will slow, consumers will pull back, and more small and medium-sized businesses will fail, explains the Guggenheim money manager.
Stock-market bulls make the case that the U.S. consumer remains healthy, with the savings rate the highest since the last financial crisis over 10 years ago. On top of that, September retail sales rose by 1.9% and a preliminary reading of the University of Michigan’s consumer-sentiment index edged up to 81.2 this month from 80.4 in September—the highest since March though still well below pre-pandemic levels.
Minerd, however, would make the case that those figures don’t entirely reflect the fragility of the hard-fought gains from the depths of this coronavirus-fueled recession.
“The economic fallout from lack of fiscal actions increases the likelihood of a negative fourth quarter GDP print while Main Street remains in depression,” Minerd said.
He points to a stagnating, rangebound stock market that is “coiling,” a term he says is often associated with powerful moves—in either direction.
The investor says that setup may translate into a dip for the markets before they resume a bullish run higher. That is a call that does approximate what some other prominent strategists, including Morgan Stanley’s Michael Wilson, have said. Wilson has made the case that a pullback of 10% in the stock market is the most likely scenario before it rebounds to new highs.
Read: No stimulus, no problem? Stock-market bulls put faith in resilient consumer
“If we are in the eye of the storm, mounting economic and political turmoil will likely cause the stock market to go lower once it breaks its coiling range and before it can resume its rise,” Minerd writes.
U.S. government bond yields are presently on the rise, but a sharp decline in yields may also ensue, driving the 10-year Treasury note yield TMUBMUSD10Y, 0.866% to record lows at around 0.10%, and they could recede further from there, Minerd speculates.
“We could ultimately see a ‘yield’ of negative 50 basis points on the 10-year note, and corporate yields in the neighborhood of 1 percent for investment grade corporate debt,” he said.
Despite the gloomy outlook, stocks in October have been rising and were rallying on Thursday on apparent hope for a pact on coronavirus relief package happening soon in Washington.
So far this month, the Dow Jones Industrial Average DJIA, +0.54% has gained 2.2%, the S&P 500 index DJIA, +0.54% advanced 2.2%, while the Nasdaq Composite Index COMP, +0.18% has gained 3.1%.
