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There are some promising economic signs for the second half of this year, but too many questions remain unanswered ranging from what will happen with the rate of COVID-19 cases and results of the upcoming U.S. election, according to market experts from three Legg Mason investment divisions who spoke Thursday during the webinar “Anatomy of a Recession.”

“The next couple of months are going to be choppy — especially with the election coming up in November,” Jeffrey Schulze, an investment strategist at ClearBridge, said.

Margaret Vitrano, a portfolio manager at ClearBridge, predicted further into the future, telling viewers: “I do think the second half of this year is going to be choppy.”

For Schulze, one big question for now is: “What happens when the unstoppable force meets an immovable object?” The unstoppable force in this case is the “tenacious determination” of policymakers — specifically the Federal Reserve and Congress — and the immovable object is the U.S. economy, he said.

The economy right now is “extraordinarily fragile and facing several headwinds” that include rising COVID-19 infections and bankruptcies, as well as a “hesitant consumer,” he said.

We experienced a “very quick recession” that ended in May or June, he noted. “Policymakers were able to short-circuit” the normal “recessionary process” seen in past economic downturns. The fact that this recession was caused by a virus made it easier than in the past to agree on a stimulus plan early on, he said.

Continued COVID-19 Concerns

“We think that there’s a lot more upside for equities” now, he said. However, key questions include how big the first pullback will be and when it will happen, he noted.

He predicted the size of the first pullback will be determined by the “shape of the recovery,” which will “be dictated by the wave of infections that you’re seeing across the Sun Belt.”

Because of that recent surge in infections, it appears the coronavirus is not seasonal as many other viruses are, said Tim Wang, head of investment research at Legg Mason real estate investment division Clarion Partners. This “unexpected” second wave we are seeing “may actually slow down the reopening of the national economy” and “change the shape of the recovery from the initial V shape to more like a U shape,” he projected.

What seem to be positives, however, are that the death rate does not seem to be growing significantly with the increased rate of infections, suggesting the most at-risk people are avoiding infection, while consumers and businesses are likely getting better at safety initiatives, Wang said. Unless hospitals become overwhelmed, he predicted it is unlikely we will see more statewide lockdowns like we saw in March and April.

COVID-19 has “accelerated trends that were already in place,” according to Vitrano. That includes an increased shift to remote work, cloud adoption and an overall digital transformation of companies, increased cord-cutting of pay TV services in favor of streaming video services, and an accelerated shift to e-commerce and away from traditional brick-and-mortar retail stores, she said.

It will likely take one to three years for businesses to fully recover from this downturn, depending on the company and sector, she predicted.

Election Predictions

Echoing comments by Jeremy Siegel, professor of finance at Wharton and WisdomTree senior investment strategy advisor, in recent conference calls on the state of the markets, Schulze predicted that a sweep by the Democrats, which is looking to be increasingly possible based on polls, will likely result in higher corporate taxes. A Democratic sweep may also result in more regulation for key sectors of the economy, Schulze warned.

However, there could be a “small positive for the markets” if Joe Biden wins the presidential election but the Senate remains Republican because that will likely take the risk of higher taxes off the table, Schulze said. If Biden wins, he may hold off on tax increases to help the economy continue growing and avoid midterm losses for Democrats, Schulze predicted.

Government spending, meanwhile, could offset some of any potential tax increase, he projected, adding there would also be the possibility of tariff reductions on China if Biden wins, which could also “offset some of the tax increase,” Schulze said.

However, the S&P 500 does not typically start to price in election buzz until August, he noted. At that point this year, the Democratic and Republican conventions will have happened and Biden will have presumably selected his vice presidential running mate.

Western Asset’s Take

Like the ClearBridge investment specialists, John Bellows, portfolio manager at Legg Mason’s Western Asset fixed income specialist division, pointed out “there’s a lot of uncertainty right now,” adding: “The reality is nobody really knows” what will happen over the next few months.

What is clear is that the Treasury market in March “just wasn’t working” — it “stopped functioning,” he noted. But the “tremendous intervention” by the Fed that included buying $75 billion in Treasurys that month worked to stabilize the market, he said.

Bellows predicted the Fed will use a “wide range of their tools” going forward to continue helping the economy because of the high unemployment rate.

— Check out Bernanke to Congress: Give States More Aid Now on ThinkAdvisor.