As we discussed in an earlier blog post (and in our client research), much depends on the path of monetary and fiscal policy, particularly the fiscal stimulus programs put in place in response to the COVID-19 crisis in March and April.
Back in March, hopes were high that by the end of July, the trends in COVID-19 would look better and there would be less need for such aggressive fiscal support. Sadly, that has not been the case, and the markets have clearly come to expect a new fiscal package to maintain support for the still shaky US economy. The concern is that a “fiscal cliff”, i.e., a sudden drop-off in government support before the economy has regained self-sustaining momentum, will lead to a renewed bout of heavy economic weakness.
Much has been made about the divergence between the path of the US (and global) economy and that of the stock and corporate bond markets. Even while economic and earnings growth is historically weak and remains under severe pressure from a rapidly spreading virus, major stock market indices have rallied and are at or near all-time highs. Market valuations based on forecasted earnings over the next 12 months have clearly risen sharply.