Consumer Confidence not Deterred by COVID Resurgence

When you can’t change the direction of the wind — adjust your sails.

H. Jackson Brown, Jr.

Many countries and regions are seeing a resurgence of COVID cases, bringing back mobility restrictions. Unlike the economy-wide shutdowns of the first wave, we continue to expect limited impact on broad economic activity from the second wave. While some of the recent stock-market anxiety can be explained by this, we expect consumer confidence to continue improving. After a steep fall earlier this year, U.S. consumer confidence should continue to slowly recover (Chart 1), underpinned by massive fiscal support, and resilient housing and stock markets. More importantly, we believe household sentiment is growing resilient toward the resurgence of COVID cases. A recurring theme for us is that while the economy will recover, it will look different as we adapt, and digitalization intensifies.

Chart 1: U.S. Consumer Confidence Building COVID Immunity

Chart 1: U.S. Consumer Confidence Building COVID Immunity

Source: Bloomberg, BMO GAM (as of September 30, 2020)

Resilient Housing Market Underpinning Households

While many businesses remain cautious and wait for greater clarity on the demand outlook, confident consumers are driving the recovery. Besides the fiscal effort to support incomes, another key reason for consumer resilience is wealth. About half of U.S. wealth consists of housing while the other half is made up of stocks and bonds, most of which have gone up this year and thereby supporting confidence. The U.S. and Canadian housing markets roared this summer, making the COVID recession truly unique.

Chart 2: Robust Housing Prices to Support the Economic Recovery

Chart 2: Robust Housing Prices to Support the Economic Recovery

Source: Canada: Teranet-National Bank Home Price Index National Composite 11 Index; U.S.: S&P Case Shiller 20-City Composite Home, Bloomberg, BMO GAM (as of September 29, 2020)

Although we doubt housing will maintain such momentum into 2021, with the worst of the COVID storm behind us, monetary policy in money-printing mode, and interest rates near zero, we think the odds of a hard-landing scenario for housing are much lower than they were back in April. For Canada, a more sustainable economic recovery through the housing market will require renewed immigration. Investments toward green infrastructures are likely to accelerate in 2021.

Upcoming Earnings Season to Reflect Uneven Healing

Another corporate earnings season is upon us, and between the virus, the upcoming U.S. election, earnings announcements will bring their usual share of volatility. With most of the negative macro backdrop behind us and many firms no longer communicating guidance on their outlook, we think this reporting season is likely to be less eventful as we are in the middle of the recovery phase with lingering COVID uncertainty. On a sector basis, however, there could be greater scrutiny to sectors that have either benefited or suffered the most as COVID continues to distort how consumers spend.

Overall, we expect analysts to continue revise up their 2021 earnings expectations (Chart 3) as economic activity normalizes and society learns to live with the virus. Rolling out a vaccine in 2021 would leave upside risk to those expectations while moving beyond the U.S. election should also be positive for equities.

Chart 3: 2021 Earnings Expectations Overcoming COVID Fear

Source: Datastream, BMO GAM (as of September 30, 2020)

Portfolio Update: Planning the next move

We made no major changes to our portfolios recently, but the global investment team has been warmly debating how to position and act upon the potential for higher market volatility ahead of the U.S. election. As for all sources of uncertainty, we think moving beyond the U.S. elections will remove a major fear factor for investors. The unusual feature of this upcoming election is that the winner might not be known on November 3rd, although recent polls are giving Biden a solid lead over Trump. Despite this short-term uncertainty, our 12-18-month outlook remains positive for equites with the economic recovery well underway helped by fiscal and monetary policy.

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