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.

 

 

Market Challenges: US Elections, Virus and Key US Economic Data

The stock market faces two challenges near term -- the US elections and the resurgence of the coronavirus.  There are a number of conceivable paths for the market depending on the elections' outcome.  The significance of the virus' resurgence could lessen if a successful vaccine is announced.

Regarding the elections, the first issue will be whether the results are clear cut on November 3.  A clear victor of the presidency could trigger a relief rally.  In contrast, the market may sell off sharply in the absence of a clear winner -- with one caveat discussed below.   The market would likely remain under pressure until the election results are resolved.

Whether Trump or Biden wins will make a difference for the market.  A Trump victory would likely be viewed positively, given his pro-growth policy stance.  A Biden victory would likely be viewed conditionally on whether Republicans control at least one of the Congressional branches.  By standing in the way of a full-blown passage of Biden policies, Republican retention of the Senate would mitigate any negative market reaction to his win if not prompt a relief market rally.  It also could prompt a relief rally if the presidential election is not clear cut.  In contrast, if control of the Senate looks to being passed to the Democrats, the market may sell off even if the presidential election is not decided.  And, if Trump is the victor, there is sure to be market talk of another impeachment attempt down the road, putting a damper on any rally.

Any relief rally in the case of a Biden victory may very well be short-lived, however.  There is a risk of heavy year-end profit-taking in anticipation of higher capital gains taxation under his administration.  The market could turn down sharply later in November and into December.

The market's evolution subsequent to the elections may depend on whether a successful vaccine against the virus is announced.  A vaccine should lead to a further pickup in economic growth next year regardless of who wins the presidency.  So, a sell-off on a Biden victory could end later in November if approval of a vaccine is announced then.  Or year-end profit-taking could be restrained.  

The US economy's current strength is likely to be seen in this week's key US economic data.  Consensus looks for an uptick in the Mfg ISM to 55.8 in October from 55.4 in September.  The Markit Mfg PMI inched up in the flash report, in line with consensus.  The Phil Fed Mfg Index jumped, suggesting upside risk.  Consensus looks for +600k m/m October Nonfarm Payrolls (versus +661k in September) and a dip in the Unemployment Rate to 7.6% from 7.9%.  Census workers should subtract about 145k from Payrolls, after subtracting about 30k in September.  But, the Claims data suggest the risk is for stronger-than-consensus Payroll and Unemployment Rate prints.