Oct. 5, 2020 - There's not much on the calendar this week, but that doesn't mean this is going to be a quiet week for stocks.
The news that the president tested positive for coronavirus roiled markets Friday. Since then we've learned about positive tests for multiple White House and campaign staffers, several Republican Senators, and a few members of the White House press corps. However, markets aren't selling off on each new report, in fact, Monday's close marked a multi-week high for the S&P 500 and the Dow Jones Industrial Average.
More interesting is that the rally Monday was broad-based with every sector posting gains. This seems like a bet that more economic stimulus is coming. While the tone from some of the players on Capitol Hill has become more conciliatory since last week, there still seem to be enough sticking points that concrete details of a new package don't seem to be widely available.
It isn't just stocks that seem to be pricing in a stimulus package. Bond yields are also back to June levels, before the summer-spike in coronavirus cases. This makes is seem like the market is starting price in more than just a short-term stimulus bill.
Election prediction markets shifted sharply over the weekend. While they have pulled back from their initial moves, those markets are now indicating a much higher likelihood of a Democratic sweep in the upcoming election. This makes some sense given that the president and some of his campaign surrogates are likely to be sidelined, or at least severely limited, in terms of how much campaigning they can do in the next few weeks.
A single party in control of both Congress and the White House means they will likely be able to enact much more of their agenda than under a divided government. On the Democratic side, this means more fiscal stimulus, and while that is likely to come with higher corporate tax rates, a big spending package will likely outweigh the negative effect of any potential tax hike, particularly with so many people out of work.
Goldman Sachs, which estimates the corporate tax rate increase at about 7 percentage points, said recently in a note that in addition to easier fiscal policy, a likely de-escalation of trade policy under a Democratic government is likely to be good for the cyclical sectors that have struggled during the recovery.
This reinforces the opinion we expressed Friday that the driver of markets, and thus volatility, between now and the election, is the outlook for stimulus, both in terms of the ongoing negotiations in D.C. and the longer-outlook for fiscal policy. Trump's coronavirus diagnosis, while not a direct driver of markets, raises the possibility of a number of surprises, both positive and negative for markets, which is likely to push implied volatility higher.
Economic Events this Week
Tuesday- 8:30 a.m. - Trade Balance
- 10:00 a.m. - JOLTS
- 10:30 a.m. - EIA Crude Oil Inventories
- 2:00 p.m. - FOMC Minutes
- 8:30 a.m. - Initial Claims
- 3:00 p.m. - Consumer Credit
- 10:00 a.m. - Wholesale Inventories