Markets are facing choppier waters, but the backdrop for risk assets remains positive.

After a record run from their March lows, risk assets retreated in September. Market-leading segments, like mega-cap tech stocks, fell back during the month as investors sought to take profits on highly valued names and sectors. Defensive assets, like Treasury bonds, failed to provide much cushion against the market’s risk-averse tone, underscoring the difficulty of finding effective hedges in this environment. The broad market weakness can be attributed to ongoing political uncertainty in the United States, escalating geopolitical risks, an uptick in virus cases, and marginally softer economic data.

President Trump contracting the coronavirus and an unexpected nominee for Supreme Court Justice have further complicated an already noisy political backdrop. We expect the election season to bring about a choppier near-term market environment with potentially significant implications for some sectors. However, regardless of the election outcome, we believe the backdrop will remain broadly favorable for risk assets over the medium term.

While September brought another wave of virus cases, notably in Europe, death and hospitalization rates have not spiked, and there is increasing optimism for an approved vaccine by early 2021. Economic activity in developed markets has continued to improve, albeit the pace has begun to moderate. In contrast, the recovery in China showed further signs of accelerating. Ultimately, we expect the global recovery to persist alongside massive stimulus, but its path and speed will vary by region.