Is the COVID-19 surge stalling the global economic recovery?

On the latest edition of Market Week in Review, Director and Senior Investment Strategist Paul Eitelman and Research Analyst Laura Bardewyck discussed the latest global economic data releases as well as recent geopolitical developments. They also reviewed November’s strong performance in global equity markets, including the outperformance of the value factor relative to the growth factor.

Global growth plateaus amid rise in COVID-19 cases

In general, newly released economic data from around the world points to signs of a slowdown in growth, Eitelman observed. Case-in-point: the November U.S. employment report, he said. The latest survey from the Bureau of Labour Statistics, published 4 December, showed that the U.S. economy added 245,000 nonfarm payrolls last month - down from 610,000 additions in October.

“This number represents a pretty marked deceleration, although it’s important to note that it’s still reflective of positive growth - albeit at a much slower pace,” Eitelman remarked. Digging into the details a bit further, he said that the report captured broad weakness on the services side - particularly in the leisure sector, which has been hammered by COVID-19 lockdowns this year. All told, the latest snapshot of the U.S. labour market offers up some early evidence that the resurgence of the coronavirus is taking a bit of a toll on the nation’s economy, Eitelman stated.

Broadening his focus to a global scale, he noted that while recent European retail sales numbers demonstrated resilience, global PMIs (purchasing managers’ indexes) largely showed a plateauing in growth. While the manufacturing sector held up reasonably well, the latest surveys showed that the services sector is decelerating - especially in Europe, where more significant lockdown measures were imposed last month, Eitelman said.

The slowdown in global growth due to increasing COVID-19 infections is not too surprising, he remarked, adding that the team of Russell Investments strategists remains positive on the medium-term outlook. “While there are some notable challenges in the short term, the six-to-12 month outlook continues to look more favourable, especially given the recent slew of positive vaccine announcements,” Eitelman explained.

U.S. fiscal stimulus talks resume, Brexit trade deal discussions continue

Switching to geopolitical news, Eitelman characterised the latest U.S. fiscal-stimulus negotiations as encouraging. On 1 December, members of Congress proposed a $908 billion bipartisan stimulus package, which was quickly supported by Democratic leaders in the House of Representatives and the Senate, he said.

“This proposal looks to be a starting point for kicking off negotiations, and while another round of COVID-19 relief isn’t a slam dunk, the probability of additional fiscal stimulus as early as the end of this year has definitely increased,” Eitelman stated. If anything, November’s weaker-than-expected jobs report is likely to add a bit more urgency to the talks, he noted.

Turning to Brexit, Eitelman said that negotiations between the UK and the European Union on a post-Brexit trade deal are coming down to the wire. “The current trade agreement expires 31 December, and right now, there are some thorny complications around issues like fishing rights that are making a compromise difficult,” he observed.

Given the sensitivity of large cap UK equities to the British pound, the situation warrants close watching in the UK, Eitelman said, adding that the impact on global financial markets will likely not be too meaningful.

Shifting his focus to the Asia-Pacific region, he noted that a trade spat recently broke out between China and Australia, after China announced tariffs in excess of 200% on Australian wine. “Given that tensions between the two nations have already been running high the past few months, this latest move doesn’t appear to be a major issue for markets right now - but it will be an important watchpoint moving forward, especially if we start to see some back-and-forth retaliatory measures,” he said.

A November to remember: Global equities rise 12% in exceptionally strong month

Eitelman wrapped up the segment with a look back at equity-market performance during November, which was particularly strong on a global scale. “The MSCI World Index ended the month up approximately 12%, which is one of the strongest monthly performances ever for global stocks,” he stated, characterising the performance as outstanding.

Cyclical sectors of the market did especially well during November, Eitelman noted, with the strongest regional performance coming from Europe and the UK. This was because these regions tend to be more cyclically geared, with higher levels of exposure to sectors such as financials, industrials and materials, he explained.

Digging into the numbers more, Eitelman noted that within each individual regional equity market, smaller cap and value-oriented stocks tended to be the strongest performers. The Russell 2000® Value Index, for instance, outperformed the Russell 1000® Growth Index by 9.1% in November - a significant spread, he remarked.

“At Russell Investments, we’ve been talking for a long time about how extreme the relative valuation opportunities were in favour of value securities, so it’s nice to see this bounce-back, coming on the heels of the recent favourable vaccine news. All in all, it looks like we’re seeing a bit of a transition in markets from a stay-at-home trade narrative to a reopening trade narrative,” Eitelman concluded.

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Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.