The last week’s market highlights:
Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s Fourth-Quarter 2020 Outlook:
- U.S. economy: After the third-quarter bounce, a wobblier and flatter trajectory for U.S. growth.
- Global economy: Considerable fiscal stimulus should keep economies afloat.
- Policy watch: No Federal Reserve interest-rate hikes until at least 2023.
- Fixed income: Lean into higher-risk assets to generate income.
- Equities: Focus on quality across the board (and dividend payers, too).
- Asset allocation: Consider benefits of active management amid idiosyncratic opportunities.
Quote of the week:
“Democracy is not a spectator sport.” – Marian Wright Edelman
U.S. election delivers market-friendly results…probably
After several dramatic, tension-filled days, Joe Biden has been declared the winner of the 2020 presidential race. But down the ballot, many Republican candidates outperformed expectations in their contests, in some cases by significant margins. The result: Democrats saw their majority diminished in the House, while Republicans seem likely to maintain control.
Polling models, which aggregate and analyze poll data from multiple sources, had confidently predicted a Biden win, with some putting the odds as high as 90%-95%, allowing for a heathy margin of error if the polls comprising the models ended up being far off the mark, as many turned out to have been. In some places (e.g., Wisconsin and Michigan), the polls were off to a historic degree, although not by enough to prevent Biden from prevailing there. In states like Arizona and Georgia, polls were on the money.
Meanwhile, investors have turned their attention to the prospect of divided government. This election produced neither the prolonged, contested result nor the “Blue Wave” that some investors feared could create an increase in policy uncertainty and throw cold water on the equity market rally.
The new concern for investors is the risk that the expected fiscal relief bill, whenever it’s passed, will be smaller than hoped for due to the divided Congress. While a package worth upwards of $2.5 trillion could have passed under unified Democratic control of the legislative process, it’s expected that the dollar amount will need to come down by 50% or more in order to pass a Republican-held Senate. A $1 trillion bill, while still substantial, will provide a more modest boost to growth and less economic support to small businesses and households.
In general, divided government has tended to be market friendly, even when gridlock results. From 2011 to 2016, for example, Republicans controlled both houses of Congress, and Barack Obama, a Democrat, was president. Few major bills were passed. Yet the S&P 500 Index gained about 12% per year on average amid subdued inflation, low interest rates and limited market volatility.4
Fast forward to 2021. What might we expect from lawmakers and the White House beyond COVID-19-related relief to individuals, businesses and states?
- A bipartisan infrastructure bill
- Efforts to “on-shore” jobs in U.S. industries, including manufacturing
- Legislation to reduce prescription drug prices
There’s market-moving potential in all of these initiatives, but the end result will probably be far less ambitious compared to what a “Blue Wave” could have produced.
Biden can do plenty without Congress, of course, and that may be where he focuses his energy for much of his term. While the U.S. posture toward China is unlikely to change substantively, Biden may make more of an effort to bring multilateral pressure on Beijing to persuade its leadership to reconsider its nationalistic economic policies. That means the Trump-imposed tariffs on China will probably stay in place for the time being. But broader tariffs on other trading partners, including key U.S. allies, may be removed or reduced as a goodwill gesture.
With all that to digest, how did markets react to last week’s election results? About as we’d expect. Long-term Treasury yields declined on diminished prospects for large (i.e., $2 trillion +) fiscal stimulus. The bellwether 10-year note, for example, fell 5 basis points during the week to close at 0.83% on Friday.5 The U.S. dollar weakened against almost every currency on the increased likelihood of calmer trade relations and, possibly, more deficit spending.6 Meanwhile, equity markets rallied hard, driven by reduced odds for tax increases next year and less policy uncertainty in areas such as technology and health care, with Biden a shoo-in to try to strengthen the Affordable Care Act.
The U.S. kicks off the fourth quarter with a very good jobs report
A tension-filled week that few will forget ended with news that the U.S. economy added a much-better-than-expected 638,000 jobs in October.7 In fact, this employment report showed that the U.S. labor market is clawing its way back to normal, and perhaps even gaining some steam since September. Here are some of the (many) bright spots:
- The headline unemployment rate dropped by a full percentage point, to 6.9%, from 7.9% in September.8
- Additionally, the U-6 rate, often referred to as the “underemployment rate” because it includes workers who are marginally attached to the labor force and/or are working only part time against their wishes, dipped by 0.7%, to 12.1%.9 For context, it took five years for the U-6 rate to fall this low following the end of the financial crisis-driven recession in 2009.
- These declines in unemployment occurred amid a welcome bounce in labor force participation to 61.7%, following September’s concerning drop to 61.4%.10
- The number of workers who self-identify as having permanently lost their job was about the same in October as in September— a welcome change from the steady increases we’d been seeing since February.10
On a slightly less positive note:
- The employment to population ratio (57.4%) reached its highest level in seven months but remains well below its prior-cycle peak of 61.2%, which it hit in January.11 Getting people back to work quickly is the key to a strong recovery, but for that to happen will require (a) an end to the health crisis; and (b) more economic relief from the government while we await the end of the health crisis.
- Nearly all of the net employment gains continued to reflect the return of workers who had been temporarily displaced by the pandemic. The percentage of all unemployed workers who self-identify as being temporarily laid off has fallen from a high of 78.3% in April to 29.1% in October.12 That’s still above the normal percentage, which is closer to 13%, but may be more difficult for that remaining 16% to return to work. Some percentage of temporary layoffs become permanent as time passes.
With the employment picture seemingly bright, what are we concerned about? First, the current lack of business revenues due to the pandemic. Second, the absence of government support for businesses (especially small ones), which could lead to a surge in bankruptcies, failures and layoffs over the next few months.
Lastly, despite other encouraging developments in the labor market, unemployment insurance claims data remains a worry. Since March 20, at least 1 million workers each week have filed unemployment claims for the first time. And while the total number of people who continue to collect some form of jobless benefits has fallen, it remains high, at more than 20 million. Many workers who are no longer on the state unemployment rolls have apparently been moved to federal emergency assistance programs.13