Europe in lockdown: Will the latest restrictions dampen the economic recovery?
On the latest edition of Market Week in Review, Director and Senior Investment Strategist Paul Eitelman and Julie Zhang, director, North America sales enablement, discussed the potential economic effects of new lockdown measures in Europe. They also chatted about the impact of recent vaccine developments on value stocks, in addition to the market’s reaction to U.S. election results.
European lockdowns may hurt Q4 growth, but medium-term outlook appears positive
In the wake of freshly imposed lockdowns in Europe to slow the spread of the coronavirus, concern is rising that the measures may harm the region’s economic recovery, Eitelman said. “The lockdowns in March and April proved to be quite damaging to the European economy, and while these new restrictions aren’t quite as severe as what was imposed in the spring, there is a possibility that Europe may experience negative real GDP (gross domestic product) growth during the fourth quarter,” he remarked.
On a somewhat brighter note, there does appear to be tentative evidence that the lockdowns in the region are helping to curb the spread of COVID–19, Eitelman noted, cautioning that it’s still too early to know for sure. The situation bears close monitoring, and will serve as an important watchpoint for markets over the next several weeks, he added.
COVID–19 infections are also rapidly climbing across the U.S., Eitelman said, noting that the resurgence of the virus may also dent fourth–quarter growth in the States. That said, it’s a bit more complicated to forecast how new restrictions in the U.S. may impact the economy, as lockdown decisions are made at the local level, rather than the national level, he explained.
Regardless, it’s helpful to think of the global economic recovery in two phases, Eitelman said, with the first phase pertaining to the next three months or so, and the second phase pertaining to the period after that.
“During phase one—from now through roughly February—we think the economic recovery will likely be quite choppy, as the Northern Hemisphere enters the winter months and COVID–19 infections spike. During phase two—which could begin around March, give or take—potential medical breakthroughs in the fight against the virus could lead to a powerful recovery phase, with strong above–trend growth,” he explained. In particular, sectors of the economy that have been hammered by the pandemic—such as dining, leisure, hospitality and travel—may bounce back significantly, Eitelman said.
“At Russell Investments, this positive medium–term outlook is what we’re more focused on, versus any potential noise over the near–term,” he stated, stressing that it’s important to stay invested amid any short–term volatility.
Positive vaccine news lifts value stocks
Shifting to recent market performance, Eitelman noted that Pfizer and BioNTech’s Nov. 9 announcement that its vaccine candidate had a 90% efficacy rate was a huge boost to equity markets worldwide, with the MSCI All Country World Index rising 2% on the week, as of mid–morning Pacific time on Nov. 13.
“Many medical experts had been anticipating an efficacy result in the 60% range, so the news from Pfizer was a huge positive and a big surprise for markets,” he explained. Piggybacking on the good news, Eitelman noted that many scientists believe Pfizer’s results may also bode well for other vaccines currently in late–stage testing, such as Moderna’s candidate, which uses similar messenger RNA technology.
The potential medical breakthrough led to a very significant rotation in equities toward value stocks, Eitelman said, pointing out that within the MSCI All Country World Index, value outperformed growth by 560 basis points. “Put simply, that’s a really, really big spread—in fact, it’s the largest outperformance between value and growth we’ve seen in the 20–plus years of data we have access to,” he stated.
The team of strategists at Russell Investments has been discussing for some time about how potential medical advances or a broadening of the economic recovery could benefit discounted stocks, Eitelman remarked, noting that the market reaction to Pfizer’s announcement may be a harbinger of what’s to come. “We expect that there will be a possibility for further gains in this area of the market in the year ahead,” he said.
Market focus shifts beyond U.S. elections
Turning to U.S. politics, Eitelman said that the results of the Nov. 3 elections are beginning to fade to the backburner for markets. Based on results that continue to come in from a handful of states where the presidential race was especially tight, Joe Biden appears to be the president–elect of the U.S., while power in Congress will probably be split between the Republican and Democratic parties, he noted.
“Prior to the election, there was some market anxiety over what a Biden victory might mean for markets, in particular due to the former vice president’s proposal to raise corporate taxes,” Eitelman said, “but with a divided government now appearing likely, Biden’s ability to increase taxes will probably be severely limited.” Because of this, markets have been able to look through U.S. politics more and focus on other important matters, such as vaccine news, COVID–19 infections and the state of the economic recovery, he explained.
However, the potential for U.S. politics to impact markets in the short–term still exists, Eitelman said, in large part due to the two runoff elections in Georgia that will determine which party controls the Senate. The Republicans, which have captured 50 seats, are expected to win at least one of the remaining two contests, which would allow the party to maintain Senate control. However, if the Democrats pull off a surprise by winning both seats, they would control both Congress and the White House, Eitelman remarked.