Adam said that leading indicators and real-time activity metrics suggest the “bottom” occurred in April, as states eased restrictions, labour market conditions improved and consumer spending was revitalized. He forecasted that U.S. GDP for 2020 will -5.3% before accelerating to 4.9% in 2021.
He also expects Congress and the Federal Reserve to continue to make “sparks fly” through fiscal and monetary stimulus efforts and that, fortunately, neither has exhausted their capacity to mitigate downside risk. While the Fed still has “plenty of firepower”, Adam believes ongoing negotiations have hinted at additional Congress stimulus in support of the recovery, rather than just as an emergency response.
He added that the realization of an economic rebound should push yields modestly higher – year-end 10-year Treasury target 1.0% – but the upside will be limited. The Fed expanded the scope of its purchase programs to include investment-grade and municipal bonds, so its ongoing purchases should lead spreads to narrow further.
He explained: “We favour these sectors over high-yield bonds, of which the Fed is only buying a small portion, which are subject to heightened risk due to the expected uptick in defaults. If investing in the high-yield sector, selectivity will be critical given the high exposure to energy companies and brick-and-mortar retailers, which have arguably suffered the most due to the outbreak.”
He remained confident in equities, which he expects to move higher over the next 12 months, surpassing Raymond James’s year-end S&P 500 target of 3,111, as post-recessionary periods have historically been supportive of the equity market. Adam also addressed the potential impact the upcoming U.S. election could have on markets.
