As we enter October, capital markets and investors are keyed in on the same issues: COVID-19, economic recovery, and the political environment. The latter raised questions this week between the first presidential debate, then the revelation that President Trump along with the First Lady and several aides tested positive for the coronavirus. While important, the market tends to move past these stories to the potential of additional stimulus, jobs recovery, and economic reopening.
There are three main market concerns that we have regularly addressed over the past few months: the virus, the economy, and the election. It is well-reasoned. COVID-19 may end up being the worst pandemic since the Spanish Flu of 1918, causing the first economic recession since the Great Financial Crisis, and upending the political landscape in an election year. All three concerns were brought to the forefront again this week.
On Tuesday night, the first scheduled presidential debate between President Trump and former Vice President Biden turned especially contentious and unleashed a flood of commentary and concern that an already unusual election year was completely going off the rails. If things weren’t captivating enough, news broke Thursday night that President Trump had tested positive for coronavirus and was followed on Friday by an announcement from the White House that the commander-in-chief was being moved to Walter Reed Military Medical Center as a precautionary measure.
The President obviously has access to the best health care providers and treatments available, but the infection should pull him off the campaign trail for at least the next ten days and make the next scheduled debate on October 15th unlikely to occur.
At the risk of sounding callous, these kinds of dramatic headlines probably do not mean all that much for the market. Post-debate on Wednesday, all major domestic stock indexes finished in positive territory. Post-diagnosis on Friday, the S&P 500 traded in negative territory all day but closed down less than 1%. Diversified stock portfolios performed much better, led by US small cap stocks which advanced 0.53%.
As David pointed out in last week’s Insight, we invest in companies, not politicians, parties, and governments. This dynamic has historically translated to a non-material impact on market returns and economic growth based on political party control.
COVID-19 testing continues to increase in the US to between 700,000 and 1,000,000+ tests per day. Based on the recent experiences of other countries, the percentage of positive tests needs to be well below 5% to push down new infections. While positive test rates have risen in certain US cities, they continue to trend broadly lower nationally to approximately 5%, which is a good sign. The US could still increase the number of tests per day significantly or consider actions to push down the number of new infections further.
New confirmed positive cases are running below the summer peak, but above the spring peak. The obvious caveat is that far fewer cases are being missed now thanks to 7 to 10 times the number of tests. A somewhat concerning sign is that case counts and hospitalization rates have stopped improving over the last three weeks and are even slightly rising. Epidemiologists expect renewed increases in spread due to the change in seasons and people shifting indoors, but for now, the increase appears modest.
Death rates are still trending lower. The Centers for Disease Control (CDC) tracks the number of deaths from all causes versus the number of expected deaths based on trend to arrive at “Excess Deaths Associated with COVID-19.” This may be a better data point due to pre-existing conditions and co-morbidities. There have been excess deaths above the expected threshold since the week ending March 28th and peaking at 40% above the threshold on the week ending April 11th. However, for the week ending September 19th, the predicted number of deaths is now back under the threshold.
Friday morning’s jobs report from the Labor Department showed continued recovery but at a slower pace. Total nonfarm payroll employment rose by 661,000 in September, and the unemployment rate declined by 0.5% to 7.9%. The number of unemployed people fell by 1 million to 12.6 million. Both figures have declined for 5 consecutive months but are higher than in February by 4.4% and 6.8 million jobs, respectively.
The headline jobs increase was below expectations; however, the previous two months were revised up by 145,000 jobs combined. The headline unemployment rate decrease to 7.9% was somewhat due to the wrong reason – a decline in the labor participation rate.
The rise in permanent job losses, the decline in participation, and the decline in the prime employment population ratio are concerning. Although there was some improvement, overall it was a disappointing jobs report.
The jobs market and pockets of the economy appear to be losing some recovery momentum as direct stimulus aid from the CARES Act has run its course. President Trump’s positive diagnosis and a disappointing September jobs report may not be enough to motivate Democrats and Republicans to break a months-long stalemate for another stimulus deal. But Treasury Secretary Mnuchin and House Speaker Pelosi were upbeat after several days of meetings.
There are still several unresolved differences between the $2.2 trillion Democratic HEROES Act, which passed the House on Thursday without Republican support, and the Trump administration’s latest offer. In a letter to the Democratic caucus, Speaker Pelosi noted five key areas of disagreement: 1) the total amount of spending, 2) unemployment benefits, 3) funding for schools and state & local governments, 4) funding for child tax credits, and 5) providing funds for testing and tracing of the coronavirus.
White House Chief of Staff Mark Meadows said President Trump is eager for a compromise. Mnuchin and Pelosi spoke for more than an hour on Friday about those differences, and their conversations are expected to continue. The House left D.C. on Friday, with the promise of 24 hours’ notice before a vote on any legislation. I just hope it doesn’t turn into another debate like we saw this week.
Have a great Sunday!
Timothy W. Ellis, Jr., CPA/PFS, CFP®
Senior Investment Strategist, Wealth Strategist