SEI recently released its third-quarter Economic Outlook. A summary of the conclusions is provided below:

• The MSCI USA Index (a broad measure of US equity markets) has more than doubled since hitting a closing low on 23 March 2020. Outside of the US, equity market performance has been not quite as stellar, but remains impressive.
   
• What might be more surprising is the relentlessness of the advance in risk assets over the past 18 months. Waves of new infections around the world, the emergence of persistent shortages of goods and labour, inflation rates that have surged higher for longer than expected and the prospect of fading government relief in the months ahead have not derailed the stock-market rally.
   
• The summer COVID-19 wave did slow the US economy’s upward momentum during the third quarter. The spread of the virus restrained consumers’ willingness to spend on restaurants, hotels, air travel, entertainment and other services.
   
• In recent months, purchasing manager surveys have shown economic growth cooling in the U.S., although the level of activity remains quite strong versus the pre-pandemic period. Europe, led by Germany, appears to be on the upswing. The decline in delta infections, allowing for more tourism, and an increase in EU fiscal support are providing a boost to activity.
   
• The challenges posed by COVID-19 and the disruptions to production have pushed inflation to levels not seen in many years in various countries. The immediate concern is the cost of energy. Natural gas prices have soared on the continent as shortages prevent the normal addition to reserves ahead of the winter season.
   
• Energy woes probably won’t cause governments to deviate from the climate change agenda they have put in place. The German election underscores this point. Although it will take a couple of months to cobble together a coalition, all likely members are committed to reducing carbon admissions.
   
• Beyond energy, the reopening of the European economy should cause the price of services to rise as they have in the US, albeit to a far more limited extent. The overwhelming assumption is that any pick-up in inflation will be short-lived.
   
• While supply chain disruption, lingering inflation and political dysfunction all present potential short-term headwinds, we believe that global economic growth will continue at a rate that significantly exceeds the sluggish pace that prevailed following the 2007-2009 global financial crisis over the next year or two.
   
• Globally, the earnings of publicly traded companies also remain robust, and we believe analysts are still underestimating their strength. With the exception of Japan, earnings estimates for 2021 have been raised dramatically versus just six months ago. Forecasts for 2022, on the other hand, have been cut in half from where they were six months ago, but earnings still are expected to show mid-to-high single-digit gains.
   
• This lowering of the bar for next year could allow for upward revisions in earnings estimates, assuming—as we do—that the renormalisation of global economic growth gets back on track with wider vaccine distribution and a declining delta wave.

A full-length paper is available if you wish to learn more about these timely topics.

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