We are now into the third straight week of downward moves in equity markets. Volatility remains elevated. This raises the question: why?
The latest expectations for the US economy predict a +32.9% rebound in Q3 2020 GDP (big rise from the lockdown lows) followed by slower growth in Q4 2020 (+1.3%). That would result in an annual growth rate for the US economy of negative 3.8% for 2020, and a “modest” recovery in 2021 with growth of +3.2%. These latest economic forecasts have not changed very much, so would not necessarily justify the selling we have seen in equity markets. Perhaps markets had been pricing in a more optimistic economic scenario and are now re-pricing a more realistic outcome? This is hard to say, but for now we would argue this is not the cause.
The Fed Chairman Jerome Powell gave testimony to Congress last week and he noted a “marked improvement” in many economic indicators. He said that household spending had recovered three quarters of its earlier decline, and that the labour market had added about half the jobs lost in 2020. According to Powell, the path ahead is uncertain, and a full recovery likely depends on US citizens feeling safe to re-engage in a wide range of activities. He also promised that the Fed would continue to support the US economy for as long as required, and in whatever way is necessary. Changed perceptions of future stimulus measures from the US Federal Reserve could also result in equity market selling, but again, the latest commentary from the Fed leads us to believe this is not the cause.
The truth is, we may simply be seeing some profit taking in equity markets after an incredible recovery rally in global markets. Further, the rise in COVID cases in some countries as we move into Autumn may be weighing on market sentiment in the short-term.
At Dominion, we believe that the moderate increase in volatility and selling in equity markets was to be expected. We have warned since March that we are not out of the woods yet, and we should expect to see periods of higher volatility in markets through 2020 and into 2021. Our focus on high-quality and high-growth businesses, as well as our proprietary risk management system, offers protection from these bouts of volatility. The underlying trends powering the businesses in which we invest remain unchanged – and our investment portfolios remain positioned to weather the short-term COVID storm and drive superior long-term investment returns for the patient investor.
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