Stock Market Rally Should Continue Into January

The stock market's rally should continue at least into early January.  The market will likely continue to ignore new virus cases and consequential deaths as well as soft US economic data now that two vaccines have been approved and are being given to the public.  The bad news is viewed as temporary.  While the fiscal stimulus bill will provide a modest boost to the economy, its passage means the possibility of its absence is no longer hanging over the market.  The most important hurdle for the market now is the Georgia run-off Senate elections on January 5.  This is far enough ahead to allow for a further rally until then.  

The drag from the renewed shutdowns appear to have shown up in the 1.1% m/m decline in November Retail Sales and the increase in Initial Unemployment Claims.  But, their import may be less than meets the eye.  Indeed, the Atlanta Fed model's estimate of Q420 Real GDP Growth was cut only slightly to a still huge 11.1% (q/q, saar) from 11.2%.

Some of the Retail Sales weakness could have resulted from price discounting.  Also, a decline in Retail Sales is not unusual after a surge in the prior month, as was the case in October.  Such "consolidation" in sales could last a few months.  It's noteworthy that car companies were not discouraged by the decline in sales last month.   The November Industrial Production Report shows a bounce in Motor Vehicle Assemblies to an above-trend level. 

The increase in Initial Claims likely reflects a resurgence of layoffs from the shutdowns.  Initial rose despite the potential for an unwinding of a post-holiday rebound.  This suggests that the increase in shutdown-related layoffs was even greater than the 24k increase in Initial Claims. In any case, it will be important to see if Continuing Claims rise in this week's Report and confirm the worsened labor market situation.  The prior week's decline in Continuing shows that re-hiring remained strong.

This week's US economic data are of minor significance for the market.  Some are expected to pull back from very strong prints in the prior month.  These include November Existing Home Sales and Consumer Spending.  But, others, like November Durable Goods Orders, are seen rising further.  It will be interesting to see if the December Conference Board Consumer Confidence Index confirms the increase in the University of Michigan Consumer Sentiment Index.  Although the Conference Board Index is known for its labor market components, the Claims data already point to a slowdown in December Payrolls (excluding census workers).

What If There is No Fiscal Stimlus?

The stock market will have to navigate through a number of events this week, including possible fiscal stimulus bill, an FOMC Meeting, continuing Brexit negotiations, start of the vaccine in the midst of renewed shutdowns, inclusion of Tesla in the S&P 500 Index, quarterly witching  expiration of options and futures, and US economic data.  There are reasons to think that any hit to the market from them will be contained.

This week should see some sort of conclusion regarding passage of  a fiscal stimulus bill this year.  Passage is far from certain and may not be known until the end of the week as Democrats and Republicans play "hardball."  Interestingly, Fed staff discussed the economic implications of no passage at the November FOMC Meeting.  The implications are not as dire as one might think from news accounts.  Here is what the Meeting's Minutes say:

1.  Although this lack of additional fiscal support was expected to cause significant hardships for a number of households, the staff now assessed that the savings cushion accumulated by other households would be enough to allow total consumption to be largely maintained through year-end. 

 2.  Recent data on tax receipts also suggested that the fiscal positions of states and localities had deteriorated less than expected, which led the staff to boost the projected path of state and local government purchases. [Note the improved financial positions may explain the flattening in State Payrolls in November.]

3.  In the staff’s medium-term projection, the assumption that significant additional fiscal support would not be enacted pointed to a lower trajectory for aggregate demand going forward.

 4.  [However,] with monetary policy assumed to remain highly accommodative and social-distancing measures expected to ease further, the staff continued to project that real GDP over the medium term would outpace potential, leading to a considerable further decline in the unemployment rate.  

 5. The resulting take-up of economic slack was in turn expected to cause inflation to increase gradually, and the inflation rate was projected to moderately overshoot 2 percent for some time in the years beyond 2023 as monetary policy remained accommodative.  

The Fed staff's projection assumed that social-distancing measures would ease further.  This development, however, is not happening.  So, unless this changes as vaccines are rolled out, there is downside risk to its medium-term forecast. And, this could prompt the FOMC to expand its asset purchase program at this week's meeting -- a positive for the stock market.

The latest Claims data show the renewed shutdowns are having an impact.   The +137k rebound in Initial Claims to 853k probably reflects /1/ a post-holiday rebound to above trend and /2/ layoffs stemming from the resurgence of the virus. Each factor may have accounted for about half of the 137k w/w bounce.  Initial Claims could fall in this week's report, as the post-holiday rebound unwinds.  An unwinding would subtract about 35k from Initial.   Whether Initial falls will depend on whether virus-related new layoffs speed up further.

Consensus apparently expects the renewed shutdowns to weigh on other data, for November, due this week.   Retail Sales are expected to fall 0.3% m/m, with Ex Auto slowing to +0.1%.  Industrial Production is seen slowing to +0.3% m/m from +1.1%.   And, December business surveys -- Market Mfg PMI and Phil Fed Mfg Index -- are expected to slip.  Consensus looks for flat November Housing Starts.

   

The Irony of the November Employment Report

 The stock market should be supported this week by improving chances of fiscal stimulus,  the likelihood of FDA approval of a vaccine, and possibly additional ECB monetary policy easing.  Both Democratic and Republican Congressional leaders are said to want to pass a stimulus bill before year end, according to news reports, although there are still areas of difference.  However, for the most part, the stimulus seems to be just a reduced extension of current benefits.  If so, it will do little to boost growth.  So, the situation may be more of "buy the rumor, sell the fact."

News reporters described the November Employment Report as weak and, as such, a catalyst for a stimulus bill.  However, while there was a sharp slowdown in Payrolls from the out-sized gains of the prior few months, the m/m gain is still large from an historical perspective.  And, taking account of other parts of the Report, as well, the overall Report is, in fact, strong.  So, the irony is that a strong Report will be pitched as weak to push for passage of more fiscal stimulus -- a combination that is positive for the stock market.

The sharp slowdown in November Payrolls to +245k Total and +334k m/m Private reflected 4 shifts:  /1/ A flattening in the two sectors that had rebounded the most from the virus — Leisure/Hospitality  and Retail.  Both likely slowed as a result of the renewed shutdowns.  /2/ A moderation in other sector job gains, but with still good-sized gains in cyclical sectors like manufacturing and construction.  /3/ A surge in Transportation and Warehousing, resulting from the increase in home delivery services.   /4/ The 99k drop in government jobs was due almost entirely to the winding down of census jobs, which fell 93k. 

Despite the slowdown in jobs, the Report is in line with above-trend economic growth in Q420.  The Nonfarm Workweek stayed at a very high 34.8 Hours.  As a result, Total Hours Worked rose m/m.  And, the November level of THW is 8.9% (annualized) above the Q320 average — supporting the idea of strong Q420 Real GDP Growth.  Indeed, the Atlanta Fed model's estimate of Q420 Real GDP Growth was raised to 11.2% from  11.1% after the Report.  This GDP pace and the size of the Payroll gain are above trend -- seen in the decline in the Unemployment Rate to 6.7% from 6.9%.

The declines in Initial and Continuing Claims in the latest report would seem to support the idea of strong growth continuing in November.  But, these data should be viewed cautiously.  They were for the Thanksgiving week, and seasonals may not have adjusted adequately for state offices closed for the holiday.  If so, it could take 1-2 weeks of additional data to see if the latest prints are telling the right story.   If the declines resulted from bad seasonals, Claims should rebound to above trend levels in this week's report and then pull back to trend in the subsequent report.  A smaller increase, such as the consensus estimate of +13k to 725k Initial, would signal that strong growth is overriding renewed shutdowns in terms of the labor market.

 

Besides Claims, inflation data for November will be released.  They are not expected to stand in the way of additional fiscal stimulus or continuing easy monetary policy.  In particular, consensus looks for a modest increase of +0.1% m/m for both Total and Core CPI.   

Stocks Being Helped By Strong Economic Growth

The stock market appears to be looking past the latest upsurge in virus cases, as mostly good news about vaccines have boosted expectations of an end to economic displacements sometime next  year.  In addition, growth has been exceptionally strong at the start of Q420.  And, Biden's choice of Janet Yellen to be Treasury Secretary bolsters expectations of a continuation of strong growth next year. 

The economy's recent strength is captured in the Atlanta Fed model's latest forecast.  On Friday, the forecast was boosted to 11.0% (q/q, saar) from 5.6%, as newly released data showed both consumer spending and business equipment spending climbing much faster than the model had estimated previously.  Its latest forecast is far less of a slowdown from the +33.1% Q320 GDP pace than most economists had expected.  To get the bearish forecasts of sub-3.0% for Q420 Real GDP growth requires a decline in the second half of Q420. 

This week's key US economic data are not likely to signal such weakness.  But, if they do signal a sharp weakening, the market could view it as increasing the odds of large fiscal stimulus in early 2021.

Consensus estimate of a dip in the November Mfg ISM to 57.9 from 59.3 in October would keep the Index at a high level.  The Phil Fed Mfg Index supports the consensus estimate.  While the Market Mfg PMI rose in November, it could have been catch-up to the strength seen in the October Mfg ISM.  

The consensus estimate of +500k m/m November Payrolls, with Private Payrolls +650k, risks being too low.  The Claims data point to a slowdown in Private Payrolls from October's enormous +906k.  But, they still suggest a large increase.  Census workers should subtract about 95k from the m/m change in November Payrolls, versus -138k in October.  With other government workers likely being cut, as well, the implicit consensus estimate of -150k for total government jobs may be reasonable.

The consensus estimate of a 6.7% Unemployment Rate, versus 6.9% in October, risks being too high.  The Insured Unemployment Rate, calculated from the Claims data, fell a full percentage point between the October and November survey weeks.  Even if the Unemployment Rate falls somewhat more than consensus, it still would be well above the 3.5% pre-virus level and support arguments for fiscal stimulus.

On the political front, Biden's choice of Janet Yellen as Treasury Secretary bolsters the view of continuing strong economic growth next year.  She is pro-growth, having argued for a low-interest rate monetary policy when at the Fed (using optimal control projections of the Fed's econometric model of the US economy -- among the first to demonstrate such projections was my PhD dissertation, a number of years earlier).  So, she should support the Fed’s current easy policy as well as anti-virus fiscal stimulus.  But, she probably won’t stand in the way of a re-distributional tax increase.   While the latter would be a market-negative, it is an issue for next year and could depend on the outcome of the two Georgia run-off Senate elections on January 5.

Fears of Virus, But...

The stock market will likely continue to be restrained by fears of renewed virus-induced shutdowns in the next few weeks.  These fears risk being underscored by some pullback in upcoming key US economic data.  But, there are reasons to think a market retrenchment will be modest.  The next round of data pullbacks are not likely to be sharp, with their levels still signaling above-trend growth.  And, the likelihood of FDA approval for emergency use of two vaccines should continue to serve as a backstop. for the market.  On the political front, Trump's attempts to reverse the election results should soon come to an end.  More importantly, news reports suggest that Biden will pick a moderate for Treasury Secretary.  Both would be stock market positives. 

Early evidence points to some softening in two upcoming economic data -- November Mfg ISM and Nonfarm Payrolls, both due in the first week of December.  Two regional manufacturing surveys -- NY Empire and Phil Fed -- both slipped in November.  But, they stayed at relatively high levels.  The Claims data point to a slowdown in Private Payrolls after December's surge.  But, the Claims data also suggest a further decline in the Unemployment Rate, which would signal above-trend growth.

Data released so far point to strong Q420 Real GDP Growth.  The Atlanta Fed model's current estimate is 5.6% (q/q, saar).  In contrast, one of the weakest forecasts on the Street  -- by JP Morgan economists -- is for 2.8% in Q420 and -1.0% in Q121, due to virus-induced shutdowns and lack of near-term fiscal stimulus.   For this forecast to be realized requires a sharp slowdown in economic activity from the 2nd half of November into early next year.  The earliest evidence should be Initial Unemployment Claims.  While Initial rose in the latest report, it is too soon to say the increase resulted from virus-induced shutdowns.  It could have been just a partial offset to the prior week's drop -- in other words, just noise.  The level is still the second lowest for the move down.  But, the Claims data will be important to monitor.

Besides Claims, this week's releases of some November surveys could offer clues on whether or by how much the economy is slowing.  Consensus looks for the Markit Mfg PMI and Services PMI to edge down, but not be enough to signal a sharp weakening in growth.  This week's other important data are for October -- Durable Goods Orders and Personal Income/Consumer Spending.  All are expected to post gains.  Retail Sales already were up in October.  And, the New Orders components of manufacturing surveys were strong for this month.  But, some of the components of Durable Goods Orders appeared to be overly high in August and September and risk unwinding.  So, there is some downside risk to the consensus estimate of October Durable Goods Orders (+1.0% m/m Total, +0.4% Ex Transportation).

 

  

   

Stock Market Focus: Virus Versus Economic Growth

The stock market should continue to be  buffeted by fears of more virus-induced shutdowns versus evidence of strong economic growth in Q420.  While election resolutions are moving in the direction of a split government -- a market positive -- some of Biden's advisors have exacerbated the shutdown fears.  With the virus' contagion rising and a window for year-end profit taking opening, there is some downside risk for the market near term.

The latest Claims data suggest the impact of renewed shutdowns or curtailments has been negligible in the aggregate so far.  Initial fell  48k w/w to 709k and Continuing fell 436k to 6.786 Mn -- new lows for the move down.  While it is unlikely they will point to a speedup in November Nonfarm Private Payrolls from the huge +906k m/m in October, they still could open the door for a very strong jobs gain this month.  The Phil Fed ADS Index shows a stabilization in economic growth around an above-trend pace so far in Q420.  These high-frequency indicators will provide early evidence whether the upsurge in Covid infections is denting economic growth.

Even without this evidence, the markets are highly sensitive to the possibility that policymakers will act aggressively to contain the virus by shutting down the economy.  This concern was boosted when some of President-Elect Biden's health advisors argued that a 6-week shutdown at the start of 2021 could stop the spread of the virus,.  They probably contributed to Thursday's market sell-off.  (Ironically, other medical analysts say the virus will peak by itself in January.)  Other Biden health advisors dismissed this extreme position, however, arguing for a more targeted approach to fighting the virus.   Their comments likely helped the market rebound Friday. 

This week's US economic data are expected to underscore strong growth.  Consensus looks for 0.5-0.6% m/m in October Total and Ex Auto Retail Sales, a very decent gain after September's surge.  The Report should capture Amazon's Prime Day (as well as other retailers' heavy discount days).  But, lower prices (as seen in the October CPI) work against Sales.  Consensus looks for a hefty 1.0% m/m rebound in October Industrial Production, after -0.6% in September.  Manufacturing Output is seen up 0.9%, versus -0.3% in September.   October Housing Starts/Permits are expected to rise.  While October Existing Home Sales and November Phil Fed Mfg Index are seen pulling back a bit, the consensus estimates remain at high levels.

 

Market Focus: Election Resolution and Strong US Economic Data

The elections and US economic data have resolved in ways that permit a further stock market rally -- although year-end profit taking is still a risk later this month and into December.   Biden's projected win and Republican's presumable retention of the control of the Senate are positives.  Biden may reduce the rancor in the country while a Republican Senate will likely prevent the most extreme Democratic proposals from being legislated.  Although 4 Senate races remain undecided, with some to be resolved by a run-off in early January, expectations that the Republican candidate will win should be enough for the market for now.  In addition, the market should react positively if Biden chooses moderates for his Cabinet -- but perhaps negatively if he does not.

Meanwhile, Friday's October Employment Report shows the economic growth remains strong going into Q420.  The Report showed a speedup in Private Payrolls and a drop in the Unemployment Rate -- the strength in both cases exceeding consensus expectations.  Private Payrolls rose 906k, versus an upward-revised +892k in September (was +877k).  Civilian Employment surged 2.2 Mn m/m.  The Unemployment Rate dropped to 6.9% from 7.9%, despite an increase in the Labor Force Participation Rate.  The Nonfarm Workweek stayed high at 34.8 Hours.  And, Total Hours Worked in October are 7.7% (annualized) above the Q320 average -- pointing to very strong Q420 GDP Growth.  Note that the Atlanta Fed model's early estimate of 3.5% is too low and will likely be revised up as more data come in.

One newswire reported a misleading article.  It argued that while unemployment is falling, long-term unemployment is surging.  It based this conclusion on data from the Report showing that Permanent Job Losers as a Percentage of Total Job Losers rose to 40% in October.  But, the number of Permanent Job Losers actually fell m/m -- and the uptrend has been modest.  What pushed up the Percentage is that the number of Temporary Layoffs fell by more than Permanent Job Losers.  

This week's US economic calendar will feature inflation data -- the October CPI and PPI.  Consensus looks for +0.2% m/m for Total and Core for both.  This pace will keep the y/y steady or lower for all these measures.  And, they will underscore the likelihood that it will take several years for the past inflation shortfall relative to the Fed's 2% target to be undone.