Hope Abound

Hope abound.  Stocks rallied yesterday on solid economic data and a glimmer of hope that lawmakers can come up with an 11th hour deal to pass a new stimulus package. Stocks ricocheted from deep losses to significant gains, ultimately closing off their highs after Mitch McConnell announced that the parties were far off from an agreement.

N O T E W O R T H Y

All worked up.  Yesterday’s session was fraught with lots of emotion.  Stock futures sank overnight in response to what was coined by some as the “worst Presidential debate in history”. While we learned very little about what each candidate was planning for the US economy if elected, we certainly got a glimpse of the candidates’ personalities.  The overnight selloff was less a response to who might have won the debate, but rather more a response to the growing level of uncertainty that was fueled by the chaotic brawl between the candidates.  As dawn broke investors began to assess the success probabilities of both candidates, teasing out which industries and sectors might benefit from a Trump win or a Biden win, but before they could act on their hunches, they were treated to a spate of positive economic figures.  ADP Employment Change showed that +749k new private sector jobs were created, beating estimates and bettering last month’s +428k additions.  A second estimate of GDP came in higher than the last estimate reflecting a monthly annualized decline of -31.4%.  That is really bad but, shockingly, better than expected.  Finally, Pending Home Sales showed an +8.8% surge, beating expectations and furthering the prior month’s +5.9% advance.  Add to the list positive comments around vaccine progress and traders’ moods became more upbeat. The icing on the cake came from comments made by Treasury Secretary Stephen Mnuchin, who relayed that the Whitehouse was working with the House in a last-ditch effort to pass a new relief bill.  All the news sent stocks flying far into positive territory. With just about every Fed official calling for fiscal stimulus in the past several weeks, news about some potential progress on that left-for-dead front was certainly welcomed.  However, the news that really stoked the markets was the positive employment surprise. Clearly, unemployment is at the top of mind during this delicate recovery stage for the economy. While unemployment is directly caused by the economic slowdown, it ultimately hinders growth even further.  Struggling companies lay off employees to stem losses and unemployed workers consume less, making bad go to worse for the economy. Therefore changes in the employment situation are closely watched.  We have weekly data from the Department of Labor on new and existing unemployment claims (out this morning), which are closely watched.  Monthly, the Bureau of Labor Statistics releases their monthly report on job creation and the unemployment rate, which receives the most acute focus by traders.  The monthly Government number will be released tomorrow and yesterday’s ADP number may preempt a positive outcome, which is one of the causes of yesterday’s rally.  Employment has been showing some signs, albeit slow, of recovery but the overall numbers are still quite high and far from their pre-pandemic levels.  Many investors still remain concerned that a second wave of job losses is on the horizon, given a lack of a second stimulus bill. You can see the evidence of the potential second wave in the week’s announcements by Disney, Goldman Sachs, JP Morgan, and all of the airlines.  The real concern goes beyond those large cap, public companies and rests on all of the small, unheard of, businesses that are struggling.  Many are barely surviving on reduced revenues and with initial PPP funding diminishing, a lack of further Federal support all but guarantees that further closures and layoffs are on the horizon.  That is precisely why so many are hopeful that lawmakers can make headway in the little time ahead of an upcoming recess in which they will head back to their districts for the final election push.  Though it is not clear that the two parties and the Whitehouse can all come together and pass a package at this point, a package is likely to come after election day once the political posturing abates. Hopefully it won’t be too late to hold back a dreaded second surge in layoffs.

THE MARKETS

Stocks had a wild ride yesterday coming back from deep losses, running up gains, and closing off session highs as investors eyed the progress of a potential agreement on a new stimulus package.  The S&P500 rose by +0.83%, the Dow Jones Industrial Average climbed by +1.20%. the Russell 2000 Index advanced by +0.20%, and the Nasdaq Composite Index added +0.74%. Bonds slipped and 10-year treasury yields gained +4 basis points to 0.68%.

NXT UP

- Initial Jobless Claims (Sept 26) is expected to be 850k, down slightly from last week’s 870k claims.

- Continuing Jobless Claims (Sept 19)  may come in at 12.2million compared to last week’s 12.58million.

- Personal Income and Personal Spending (Aug) are expected to print -2.5% and +0.8%, respectively.

- PCE Core Deflator (Aug) may show that inflation picked up by +0.3% for a second month in a row.

- Markit US Manufacturing PMI (Sept) is expected to be 53.5 in line with the prior, flash print.

- ISM Manufacturing (Sept) is expected to have increased to 56.5 from 56.0

- Fed officials John Williams and Michelle Bowman will both speak today.

- This morning, PepsiCo, Bed Bath & Beyond, and Conagra Brand all beat Wall Street earnings estimates.

daily chartbook 2020-10-01