Easiest part of the economic recovery almost over: Calvert

Risk assets have extended their rebound into the third quarter, driven by better than expected economic data and unprecedented support from the US Federal Reserve, according to Calvert Research and Management.

Vishal Khanduja, Calvert’s director of investment grade fixed-income portfolio management, and Brian Ellis, fixed income portfolio manager, said markets were choppy in September as Congress failed to pass additional fiscal stimulus, COVID-19 spiked in parts of Europe and the US, and the US elections drew closer.

“Nonetheless, third quarter returns were broadly positive across the US fixed income market,” they said.

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“The US economy continued to benefit from the easing of coronavirus restrictions, as well as the aggressive actions taken by policymakers in March and April to blunt the impact of the global shutdown.

“Manufacturing and services sector surveys were strong throughout the quarter, July retail sales topped pre-pandemic levels and the unemployment rate fell to 8.4% in August.

“That said, the recovery remained uneven. Industries especially hard hit by the virus — like leisure and hospitality — remained very depressed.”

US monetary policymakers held the federal funds rate between 0% and 0.25%, while they had implemented the lending and bond-buying programs rolled out earlier this year.

“The Fed's commitment to supporting the bond markets as a price-insensitive buyer of last resort, coupled with ultra-low rates, fuelled record corporate bond issuance and massive flows into US fixed income funds,” they said.

“In August, the Fed announced that instead of pre-emptively raising interest rates to head off higher inflation, it would let inflation run ‘moderately’ above its 2% target for ‘some time’ following periods of persistently below-target inflation. This move to an average inflation-targeting strategy signaled lower rates for longer.” 

They said the fast, initial snapback — typically the easiest part of any recovery — was mostly over.

“Yet we still believe the broad US economy should continue to recover given unprecedented monetary support, the cumulative fiscal assistance provided so far and the prospect of more fiscal stimulus by year-end,” they said.

“We also think the US is beginning to adapt to living with COVID-19 until the health crisis recedes.

“In our minds, the worst of the economic shock is behind us, even if there is another wave of the virus.”

In their economic outlook, Calvert was constructive on investment-grade credit due to the Fed buying it as well as demand for income.

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