Over the next few weeks, the stock market focus should turn more exclusively to non-macroeconomic issues: /1/ President Trump's health, /2/ election-related developments and risks, /3/ corporate earnings, and /4/ potential for further fiscal stimulus. These issues should exacerbate market volatility. But, economic growth is ending Q320 at a good pace, which should keep market downside in check.
The early statements regarding Trump's fight of the Covid-19 infection are positive. But, it's not clear how or how long it will evolve. So, the market may just chase headlines until there is a firm conclusion.
Consensus looks for another large y/y decline in Q320 corporate earnings (-22%), but smaller than that of Q220 (-32%). This expectation is supported by macro-economic evidence (see my September 20 blog). Expectations of a large rebound in earnings next year could temper the import of weak Q320 profits, however.
The market may put more weight on polls showing Biden ahead than it has in the past. But, control of the Senate by Republicans or Democrats could be just as important to the market as who wins the Presidency. Republican retention of the Senate would likely cushion the market impact of a Biden win.
The macroeconomic background should be supportive of stocks and mitigate negative fall-out from the other issues. There was a strong V-shaped bounce in Q320 Real GDP. The Atlanta Fed model's estimate of Q320 Real GDP Growth is now up to 34.6% -- and still could be too low. GDP Growth should slow in Q420. But, the pace is still likely to be above-trend.
The September Employment Report was deemed weak in news stories. But, this is not the case. Most of the weakness reflected the impact of the virus on the education sector (mostly in government) and a decline in census workers. Job Growth outside of education in the private sector was little changed from August: 946k versus 952k. While the drop in the Unemployment Rate to 7.9% from 8.4% was largely a result of a drop in Labor Force Participation, the Rate would have edged down even without the latter. The lower Participation was concentrated among women and likely resulted from the need to stay home with children while they do on-line schooling.
The most significant part of the Report was the increase in Total Hours Worked (THW), driven by both the increase in jobs and a higher Workweek. THW in September were 4.1% (annualized) above the Q320 average -- a strong take-off point for Q420. It is too soon to derive an estimate of Q420 Real GDP from this figure. It could come down if the Average Nonfarm Workweek pulls back from its high September level. Or, it can rise further. Even a modest uptrend over Q420 could put THW 5% above the Q320 average -- suggesting the potential for a similar increase in Real GDP. Note, the reliance on a longer workweek in September could have reflected business caution, but it also could have reflected a quick response to the re-openings -- in which case it bodes well for job growth ahead.
This week's calendar of US economic data is very light. Consensus looks for a dip in the Non-Mfg ISM to 56.3 in September from 56.9 in August -- still a high figure. Consensus sees a slight uptick in Initial Claims to 845k from 837k in the prior week. This would still keep them on a downward trend.
The September FOMC Minutes and Fed speakers scheduled this week, including Powell, should reiterate the Fed's commitment to keep policy steady and rates low for an extended period. The shortfall in inflation relative to the Fed's 2% target could take several years to unwind, assuming inflation picks up.
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