Key takeaways

• The economy continues to recover but momentum has slowed recently as COVID cases increase.
• Fiscal stimulus from earlier this year has mostly run out and the recovery may be fragile in the near term until fiscal support picks up.
• The global recovery may be uneven but continued support from governments should help it persist.
• Volatility in the stock market may crop up due to the uncertain path of the virus and swings in expectations around fiscal stimulus.

United States

• The US is in the early-cycle recovery phase, as economic activity continues to bounce back after historic declines in Q2.
• The virus has driven a shift from consumer spending on travel and other services toward the purchase of goods, and the housing market has benefited from low interest rates and increased demand.
• High-frequency data—including measures of employment conditions—indicates that progress has lost some momentum. Accelerating virus cases and reimposed distancing measures in some states will likely weigh on activity in the near term.
• Fiscal policy has become less supportive as early-year emergency stimulus funds have largely run out. Some additional stimulus appears likely in the coming months regardless of the final election outcomes.
• The near-term early-cycle recovery may be somewhat more fragile than usual due to elevated COVID cases and a fiscal lull, but the outlook remains one of continued expected progress underpinned by rising consumer confidence, easy monetary policy, better corporate expectations, and hopes for further reopening over the coming quarters.

Global

• Global activity continues to improve, led by a synchronized recovery in manufacturing, whereas service industry activity has been slower to recover.
• China’s recovery is the most advanced, bolstered by a broad-based industrial rebound, but the pace of improvement may moderate as the recovery matures.
• In Europe, the acceleration in COVID-19 cases will likely slow the recovery. The near-term outlook is less favorable than in the US or China due to Europe’s greater willingness to impose virus-related restrictions without offsetting fiscal support.
• The path to normalcy for the global economy likely will remain uneven, but continued policy accommodation and a strong industrial rally in China should provide momentum for further cyclical improvement.

Asset allocation outlook

• The early-cycle backdrop is more constructive for riskier assets such as small cap and more economically sensitive stocks that tend to do well as activity improves.
• Policy actions are playing a larger role in driving financial market performance than in past cycles.
• Swings in expectations for more fiscal stimulus and the trajectory of the virus—amid elevated asset valuations—will continue to create the potential for outsized bouts of volatility.
• Portfolio diversification remains as important as ever, with the valuations of non-US and value equities, and inflation-resistant assets appearing relatively favorable.