Oct. 2, 2020 - Stocks drifted higher this week, but the moves made by the various indices aren't the big news.
On the economic front, Thursday's report about personal income and spending and Friday's monthly Employment Situation Report paint a picture of an economic recovery that is slowing as stimulus measures passed back in the Spring run out.
Personal incomes fell by 2.7% from July to August, while disposable incomes fell by 3.2%. Meanwhile, spending rose by 1%, after rising by 1.5% in July. The decline in incomes was due to the expiration of expanded unemployment benefits and was actually partially offset by some increase in government wages and salaries, including those paid to temporary workers hired for the decennial Census.
We saw savings rates rise earlier in the year as expanded unemployment benefits and those $1,200 stimulus checks helped boost household coffers. Without a sharp recovery in employment, or some new stimulus, that savings rate is likely to fall as people who aren't working spend those savings on monthly expenses.
On the employment front, the economy added 661,000 jobs last month and the unemployment rate fell to 7.9%. The trends in the labor market continue to be troubling. In September, 1.5 million workers who were temporarily unemployed returned to work, leaving the number of unemployed people in that category at 4.6 million. Meanwhile, the number of people who say they have lost a job permanently is now 3.8 million after 345,000 more workers joined that group in September.
The labor force participation rate also declined last month with 0.3% of people who were in the workforce in August dropping out entirely in September. This helped the unemployment rate fall further than it would have otherwise, and is another troubling sign for the economy, as that 0.3% represents thousands of people who aren't working, or even looking for work.
The largest part of the economy that was shedding jobs in September was local government education, where 231,000 people lost jobs. Another 49,000 people lost jobs in the category of state government education. These are teachers and other school workers laid off due to a combination of pandemic-related closures and budget cuts.
September's numbers don't include 28,000 job cuts announced by Disney (DIS) this week, nor thousands of job cuts previously announced by airlines and other industries that haven't taken effect yet.
This gets us to what's really driving the market... Hopes for another stimulus bill. You could see stocks rise and fall this week on headlines about the length of phone calls between House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin and vague comments about "progress" or some attempt to quantify the distance between the two sides.
While we agree with the market that another deal would be good for corporate profits, the economy, and millions of American families, these talks may between the wrong parties. Both Mark Meadows, the White House chief of staff, and Senate Majority Leader Mitch McConnell made comments this week suggesting that a new stimulus bill isn't a high priority. These opinions could change, but any relief bill would need to be passed by the Senate and signed by President Trump.
Congress is scheduled to adjourn soon so members can return to their districts for a final campaign push, so the clock is ticking if there's to be any deal before the election.
Speaking of the election, we're getting to the point where the market may be increasingly volatile as it reacts to new polling and other information about who might win, and what the makeup of Congress will be. Moody's Analytics released a report last week with its projections for what some of those outcomes may mean for the economy and there will be many more similar reports as we get closer to the election.
This brings us to the other big news Friday. The announcement that President Trump has tested positive for the coronavirus and will quarantined for some time. This definitely means a reduction of in-person campaigning in the last month before the election, but it is unclear what other implications it may have.
The market action on Friday was a bit hard to parse. Futures dropped overnight on the news of Trump's positive test, but were already in negative numbers, and didn't take out the overnight low from Wednesday morning, hardly the sort of move that seems like a panic.
Things didn't get much clearer when stocks opened for trading. Big tech stayed down, but financial services, materials, industrials, utilities, and real estate all posted gains on the day. It's hard to take one day's action as a sign, but generally, these sectors have been the least loved during the recovery, and the ones that will benefit the most from some economic rescue and/or a return to economic growth.
As we said Monday, the bets on tech stocks, even the speculative ones make sense so long as the expectations for the broader economy are for stagnation. There's no point putting your money in bank stocks if you expect the economy to be soft in coming years, because banks need a growing economy to thrive, but an innovative can take off in even the most dismal of economies.
One needs only to look at the price of Apple (AAPL) from the launch of the iPhone in early 2007 through the next several years to see this effect. They rose in 2007, even as the broader market was flat. It lost ground in 2008, but outperformed the S&P 500, and has been among the market's top performers ever since. So it makes sense for investors to keep piling money into tech stocks if the expectations for the economy are low, but as those expectations improve, we should expect some rotation out of tech and back into the rest of the market.
Our opinion is that the real source of volatility going forward will be the outlook for stimulus, either between now and the election, after the election, or after Inauguration Day. President Trump's coronavirus diagnosis almost certainly changes that picture, but at this juncture, we not sure that anyone knows exactly how.
Another way of saying this is that Trump's diagnosis raises implied volatility, while it is the outlook for stimulus that is the source of realized volatility.
All told this week, the S&P 500 gained 1.5%, the Dow Jones added 1.87% and the Nasdaq rose 1.48%.