as of September 30, 2020
Economic indicators showed a stronger than expected cyclical rebound over the third quarter. Measures of global trade, consumption, industrial production and employment continued to recover. Household spending has remained robust, partly due to fiscal support. Positive news around improved treatments and vaccine development and deployment could speed the recovery. While this momentum could continue in the medium term, the recovery has recently started to slow as most of the easier gains have already been realized. With restrictions still in place, recovering to pre-COVID levels will be challenging. The renewed imposition of restrictions in the Eurozone and UK has been a setback.
In the US, the Federal Reserve formalized its shift to a flexible average inflation targeting regime. This suggests that short-term rates will remain low until full employment is reached, and members are willing to let inflation exceed 2% to ensure adequate stabilization of prices. In terms of fiscal policy, several provisions of the CARES Act in the US expired during the quarter, reducing fiscal accommodation. While additional fiscal stimulus is likely, the timing and nature remain uncertain. Fiscal and monetary measures have been an important tool in cushioning the blow to households and businesses, helping to avert financial contagion.
Global equities continued their rally during Q3, with the MSCI ACWI index, a measure of the global stock market, gaining 8.1% for the quarter and reaching positive territory year-to-date. The S&P 500 returned 8.9% during the quarter, outperforming most other developed markets. Year-to-date, the S&P 500 has risen 5.6%. International developed stocks returned 4.8% for the quarter. Emerging market equities rose 9.6% in Q3. Asian emerging market countries drove the gains, returning 11.9% during the quarter.
Within fixed income, the Bloomberg Barclays Aggregate index returned 0.6% during Q3 with corporate bonds outperforming Treasuries. The yield curve saw very modest changes during the quarter, with 3-month yields falling by 6 bps, while 10- and 30-year yields rose by 3 bps and 5 bps, respectively. Investment-grade corporate bond spreads fell an average of 14 bps during the quarter to 1.4%, which is roughly 20 bps above the long-term median level. High yield bonds gained 4.6% during the quarter, as credit spreads fell by 108 bps to 5.2%, which remains above the long-term median level of 4.7%.
Mercer’s base case remains that global GDP will not fully recovery to pre-COVID-19 levels until late 2021 at the earliest, with 2020 growth expected to be negative for the global economy. The composition of global growth across countries and sectors is likely to be uneven from here. The US election in November could drive an increase in volatility, particularly if there is a delay in determining the winner. Tensions between the US and China are likely to remain elevated for the foreseeable future, regardless of who wins the US election. Uncertainty over the UK-EU transition ahead is also a point of concern as the December deadline approaches. Political risks are likely to remain elevated over the near term, and could continue to be a source of volatility and downside risk.
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