Economists at UBS expect markets to remain more volatile than normal, notably into the US election, but they still think that investors should use this volatility to position for the higher stock prices the bank group expect over the medium-term.
Key quotes
“Whatever the outcome of the US election, we think new stimulus will be rolled out after the vote and lift economic growth. The Democrat-controlled House of Representatives has already passed a $2.2 trillion stimulus package, which is indicative of the path the US government would take if we see a Blue Wave – which polls suggest is the most likely outcome. The second most likely outcome is the status quo in our view. This scenario presents the risk of fiscal policy gridlock, which would further contribute to volatility. But even in this scenario, we would expect some stimulus measures to pass. The Senate majority leader has not ruled it out, and President Trump says he is in favor of a large support package.”
“Successful vaccine trials will increase certainty about the economic outlook. Critical Phase 3 efficacy data for the most advanced vaccines in development is likely this month or next. We think that markets will start to price in the economic benefits of a vaccine as soon as positive results on its efficacy are published, as it will provide greater certainty that governments will not need to use lockdowns to manage the virus indefinitely.”
“Central bank policy is making the long-term case for equities over cash even clearer. The Fed projects that rates will remain on hold until at least the end of 2023. At the same time, the shift to average inflation targeting suggests policymakers may be willing to accept a period of moderately higher inflation. Real returns on cash are likely to remain negative, and cash lump sums can deplete quickly when we consider the possibility that personal spending may rise more rapidly than interest rates. For investors looking to draw on their savings to fund their spending, this combination of factors makes it more important to be invested in growth assets.”
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