Monday Market Review September 21, 2020
Updated: Oct 2, 2020
Economic data for the week included the Federal Reserve keeping monetary policy unchanged, but with more dovish forward guidance. Retail sales and industrial production expanded, but at a slower pace than expected, as did the index of leading economic indicators. Housing results were mixed, although general consumer sentiment improved.
Global equity markets were mixed last week, with U.S. equities ending lower, while foreign stocks gained. Bonds were also mixed following the Fed meeting as underlying interest rates changed little. Commodities gained due to a sharp weekly increase in oil prices following tighter supplies, while natural gas experienced the opposite set of conditions.
Question of the Week
What would be the impact of a Trump Presidential reelection for a second term? How important is the President on financial markets anyway?
In many ways, policies to expect would likely be similar to what’s in place today, and largely opposite of those proposed under a Biden administration discussed a few weeks ago. At the same time, Trump’s policies have not followed ‘traditional’ Republican ideologies from decades past in a variety of areas. The Senate Republicans have been far more predictable from a policy standpoint, as have the Congressional Democrats.
The practical factor for the election continues to be whether or not the Democrats are able to take the Senate from the Republicans, which, in addition to holding the House, would allow for the ability to push through a greater volume of progressive legislation. A split-party legislative and/or administrative branch could result in four years of gridlock, with little net change in policy. (That might be perceived as the ‘worst case’ or ‘best case’ depending on the observer.)
Little may change from a higher-level view if the first Trump term morphs into a second. But, it’s important to remember from a financial markets perspective that the President in power has been relatively unimportant in driving longer-term sentiment and returns. Attempting to time election results or moving out of markets to avoid volatility can result in sub-optimal results, even though the weeks prior to an election can become more volatile. Interestingly, in the cases where an incumbent is seeking re-election, one of the few consistent tendencies over the past century is based on U.S. stock market results in the three months prior to Election Day. Based on the S&P 500, a positive return for that stretch has proven favorable for an incumbent’s chances, while a negative return has favored the challenger. (For perspective’s sake, from the window starting Aug. 3, the market is up 0.75% through Fri., Sept. 18—with several more weeks to go until Nov. 3.)
That said, while politics can coincide with day-to-day financial market movements at times, the two rarely correlate meaningfully over the long haul. The charts below bear this out fairly dramatically.
The following policy items assume that a Trump reelection is accompanied by Republicans retaining the Senate, which creates a ‘status quo’ situation. A newly Democratic senate majority would create more of a wildcard:
Taxes. It is probably safe to assume the tax cuts from 2017 would remain in place. These have served to benefit corporations, which receive an immediate boost to the bottom line, resulting in higher reported earnings. Consequently, this models out to higher multi-year growth and justifies higher equity valuations. Personal income tax rates would likely also remain low, along with capital gains rates. Traditional supply-side economists argue that stronger corporate performance and fewer hurdles (such as regulation and taxes) result in a larger ‘pot’ for everyone. However, this assumes that wealth trickles down proportionately to all workers, which has been debated in recent years as income equality between different groups has widened.
Environment. This would also be assumed to be status quo, which includes minimal promotion of green technologies. It would likely be coupled with a pushback on more stringent standards, such as those adopted by California (whose standards predate the EPA and are often stricter). While the energy sector has been struggling with low petroleum prices, due to weaker demand due to the pandemic, current policies would keep additional regulatory headwinds at bay. However, energy firms have been hurt far more by weaker demand from the pandemic than by other factors.
U.S.-China relations and trade. The geopolitical tension with China has been steadily growing, and a status quo result would assume more of the same. It’s been claimed by some China experts that the country is currently just playing a ‘waiting game’—for the Trump administration to eventually end, and to instead deal with the successor. As part of their 50- and 100-year national plans, such a delay is seen as just a temporary roadblock. The important component is that a tough U.S. stance on China has support across the aisle—it’s one of the few policy items both parties agree on. So, a longer-term decoupling is likely, although the public stances and negotiation styles could differ between administrations.
Antitrust legislation. In years past, some Democratic platforms have been seen as anti-corporate (and conversely, pro-worker). This would have translated to a crackdown on large ‘oligopolies’ and a reining in of corporate power in the economy and society. In the current case, argued by some due to the more progressive political leanings of large tech companies, Democrats have appeared less interested in breaking up these firms. Republicans have certainly appeared more interested. Since it’s not quite clear where any ‘abuses’ lie and how consumers are adversely affected (many argue they’ve benefitted greatly through both product variety and cost), this issue remains complex and path unclear.
Workers. In line with trends seen globally, not just in the U.S., both parties have taken on a more populist tone in recent years, largely in keeping with the larger societal income gaps. The polarization has taken place far more on the political side than the socioeconomic side, as all parties want to be seen as ‘pro-working class.’ This creates a conundrum, although no clear evolution in policy. Continued trade restrictions may help U.S. firms in the near term, although it’s not clear that benefits trickle down to workers longer-term and could hurt consumers through higher prices. Contrary to the Biden agenda, a second Trump administration would make more progressive items, such as a higher minimum wage and other benefits less likely—although these also depend on the Congressional makeup.
Healthcare. As we noted under the Biden platform comments a few weeks ago, a Trump administration would likely continue to fight ‘Obamacare,’ and continue support for the current private insurance-based healthcare model. Despite the battles over universal coverage/single-payer format, there remains no constructed alternative to the current system for legislators to gravitate to. However, there is bi-partisan populist support for better regulation of high pharmaceutical prices and plugging some gaps to help reduce medical care costs for seniors. The industry has fought back on pharma prices, arguing that profits feed back into research and development for important new therapies, so this has largely resulted in a stalemate in recent years.
Defense. A traditional Republican policy platform has been a strong defense base. This is thought likely to persist, although the Trump administration has focused on far less global interventionism. This hasn’t manifested completely, but could continue to play a role in broader policy thinking. At the same time, China has been viewed as an increasing global military threat, which would necessitate further spending. The trend has been moving from conventional military spending towards new technologies, such as cyberwarfare, satellites, drones, etc.—all of which are technologically complex and expensive.
Immigration. The border ‘wall’ has largely been symbolic, as the Trump administration has clamped down on immigration mostly through policy, which would seem likely to continue in a second term. This has provided a seeming veil of protection for U.S. workers (championed by both candidates in different ways), but economists, who view labor in a global context, see increased restrictions of any kind as a hurdle to stronger economic performance. This is a complex issue, with outcomes the result of multi-decade trends, so the policy action of a single President may only provide a short-term impact on GDP growth. Demographics and business/worker competitiveness play a far more important role, with job training and education enhancements acting as a behind-the-scenes policy championed by many but not discussed as much by candidates in terms of specific plans.
Less stringent regulatory environment. The President promised to rollback regulations imposed over the past administration, including the expanded use of executive orders, and that has certainly occurred. It’s likely another four years would continue regulation downsizing, in a generally pro-business way, including financial markets and their oversight.
Fiscal policy. The old stereotypes have been cast aside, as parties on both sides are in a spending mode. Republicans are a bit less in favor of direct stimulus to workers (at least in the same large amounts Democrats have been), and more in favor of corporate injections. During the pandemic, airlines and the travel industry have been lobbying especially hard for more aid. This pandemic will end up being expensive regardless of who ends up in the White House, with debt ramifications far beyond the next four years.
Monetary policy. As noted earlier, a central bank should be agnostic to political pressures, but that has been easier said than done. Pressure to lower rates or keep policy as ‘easy’ as possible is preferred, since it coincides with keeping the economy growing—which most administrations prefer under their watch. The U.S. Fed has sidestepped such pressure far better than in some countries, of course, but a continuation of the current administration and ‘tweeting’ about central bank decisions runs the risk of negatively influencing public opinion about the Fed and its functions. Politics can also appear in the nomination of certain new board members, such as the controversial Judy Shelton (who has favored revisiting the gold standard—a position rejected by many mainstream economists). Regardless, the Fed has continued to stay out of the political fray over the decades, despite a variety of administrations holding opposing views.
Judicial branch. The Supreme Court is typically not a top concern of financial markets, but with the passing of Justice Ruth Bader Ginsburg, a position on the bench has opened. Any new appointee’s political leanings can tilt the balance of key decisions toward either the conservative or progressive end of the spectrum. So, this can have ramifications for decisions involving business, regulations, or any other economically-relevant area.
U.S. stocks began the week higher, including prior to the Federal Reserve meeting, but took a turn downward. Despite the extremely dovish tone (and high bar for inflation and unemployment to reach before rates would be normalized higher), stocks reversed lower as markets started to have second thoughts after Powell’s comments about needs for additional fiscal stimulus (which only Congress can provide). There also seemed to be concern over the Fed’s lack of success in generating its inflation goals so far, necessitating a unique adjustment in policy. Again, it’s the classic sigh of relief turned to worry: ‘Great, the Fed has our back’...to ‘Uh oh, are things really still this bad?’
By sector, energy, industrials, and materials led the way last week, up at least a percent each; communications, consumer stocks, and technology all declined at least a percent. Reports of Federal Trade Commission anti-trust discussions about Facebook brought down sentiment in communications/tech. Real estate ticked slightly higher, and small cap stocks rallied, despite the negative market trend by mid-week. Some of the weakness in tech and other ‘growth’ areas recently could be due to the likely downward impact of earnings in these sectors if the Biden tax plan is implemented (which the market appears to be discounting), not to mention any increase in the capital gains rate to the threatened level of ordinary income.
Foreign stocks were flattish overall last week in local terms, but turned slightly positive with help from a weaker U.S. dollar last week. Sentiment for recovery remained decent, despite reports of rising Covid infection rates in several countries—leading to government discussions about another round of autumn lockdowns. The lack of progress between the U.K. and European Union on Brexit has again raised concerns over the potential headwinds this could bring to economic recovery. Emerging markets outperformed developed, led by a rally in Chinese equities, due to continued stronger economic momentum compared to the rest of the world.
U.S. bonds declined slightly as interest rates ticked up across the curve, potentially related to Fed actions to not pursue additional purchases of long-term treasuries. That maturity of treasuries saw the strongest drop, in keeping with duration effects, as did high yield. On the other hand, investment-grade corporates and floating rate bank loans saw positive returns. Foreign debt was mixed, but helped by a weaker dollar—developed market government bonds and local EM debt gained, while USD-denominated EM bonds declined. While straddling the fence for some time, the Bank of England hinted again at potentially taking interest rates negative.
Commodities earned positive returns last week, with strength in energy and agriculture outweighing flattish returns elsewhere. The price of crude oil rallied by 11% to over $41/barrel, with supply shortages and promises of continued limited production due to Gulf hurricane activity and planned reductions from the OPEC+ group; this offset an oversupply in natural gas markets that caused prices to decline by -10%.
(0) As noted earlier in the week, the FOMC kept rates unchanged and further elaborated on their new inflation ‘catch up’ policy in their formal communications. That language further specified the committee’s goal of seeing inflation track above 2% for ‘some time,’ although that period remains fluid. The FOMC’s summary of economic projections pointed to continued weakness for the next several years, with GDP growth and inflation both low, and unemployment slowly improving through 2023—although little change in rates was anticipated until at least that time (although a few participants did expect a rate hike before then). As in prior meetings, they noted that the forward path is very dependent on the ‘course of the virus,’ with lower demand and lower oil prices key inputs to lower recent inflation readings.
The two dissents in the committee were interesting, but stemmed less from the policy itself, and more from disagreeing about language. The two dissenters (Kapan and Kashkari) preferred more flexibility in future years and more of a focus on the mandate of a sustained 2% inflation rate, respectively. These are small differences, but get to the heart of how dovish some members would (or not) prefer the Fed’s language to be as well as micromanaging inflation targets.
(0) Retail sales for August rose by 0.6%, which fell short of expectations calling for a 1.0% increase. For the core/control retail sales measure, removing autos, gasoline, and building materials, sales fell by -0.1% for the month, which lagged expectations by nearly a half-percent, as gas stations and building materials prices were among the leading segments. Other underlying components were mixed, with food services, clothing, and furniture sales rising several percent each, while sporting goods and department store sales fell by at least a few percent each. There appears to be a bit of a negative ‘back to school’ effect, considering that most students aren’t going back to school—at least physically. This seems to have spurred the deceleration to a year-over-year growth rate of overall retail series to 2.6%.
(0) Industrial production rose 0.4% in August, but disappointed compared to the 1.0% increase expected by consensus. Within the various segments, manufacturing gained 1.0% overall, with business equipment up nearly 2%, and despite auto manufacturing falling by -4% for the month following levels moving back to a pre-Covid rate. Utilities production ticked down by -0.4%, and mining/energy production fell nearly -3% for the month. Capacity utilization ticked up by 0.3% to a level of 71.4%.
(+) The Empire manufacturing index for September rose by 13.3 points again to a level of 17.0, beating expectations for a more tempered 6.9 reading. The various components were also strong, with shipments, prices paid, new orders, and employment rising by a few points each to further expansionary levels. Additionally, assessments of business conditions six months out rose by 6 points to a strongly expansionary level over 40.
(0) The Philadelphia Fed manufacturing index fell by -2.2 points to a still-expansionary level of 15.0, on par with expectations. The underlying components performed far better. New orders, employment, prices paid, and shipments all rose significantly to even further expansionary levels—with the latter reaching levels not seen since the mid 2000’s. Expected six-month ahead business conditions also rose by nearly 18 points to an expansionary 57. These manufacturing surveys point to continued economic repair and rebound in industrial activity in key regions.
(0) Import prices for August rose 0.9%, exceeding the forecast of 0.5%. Petroleum prices rose 3% for the month; in other segments, industrial supplies increased 4%, while food and other consumer goods only rose by up to a few tenths of a percent.
(-) Housing starts in August reversed the growth of the prior month by falling -5.1% to a seasonally-adjusted annualized level of 1.488 mil. units, surpassing the -0.6% decline expected. However, the overall number remains 11% higher than a year ago. Multi-family starts were the primary culprit, falling -23%, while single-family starts rose 4%. Regionally, the Midwest and West saw gains in the double digits, while the Northeast and South experienced double-digit declines to lead the national index downward. Building permits fell by -0.9%, also below the forecasted increase of 2.0%. Similarly, the more volatile multi-family group fell -14% to lead the broader number downward. Regionally, the South saw minor gains, but all other regions experienced up to a double-digit drop in permit activity.
(+) The September NAHB homebuilder sentiment index rose by 5 points to level of 83, beating the consensus forecast calling for no change. This was a record-high level for the index, covering 35 years of readings. All three categories experienced strength, with prospective buyer traffic slightly surpassing future sales expectations and current activity. Regionally, The Midwest and South were strongest, while sentiment in the West fell slightly (perhaps influenced by extreme wildfire activity, which affected several urban areas for the past several weeks).
(+) The preliminary Univ. of Michigan consumer sentiment index for September showed an increase of 4.8 points to 78.9, beating estimates calling for 75.0. Assessments of both current economic conditions as well as future expectations rose to a similar degree as the headline index, which is a promising sign on the consumer activity side. Inflation expectations for the coming year fell by -0.4% to a still-elevated 2.7%; those for the coming 5-10 years fell by a tenth to 2.6%.
(+/0) The Conference Board’s Index of Leading Economic Indicators continued to rebound in August, rising by 1.2%, although at a decelerated rate from the prior two months. According to the Conference Board, the index remains in recession, well below a peak in February, with weaker new capital goods orders, residential construction, consumer sentiment, and financial conditions threatening the summer’s bounceback. The coincident and lagging indexes for August rose by 0.6% and fell by -0.6%, respectively. The leading indicator has fallen at a -9.3% annualized rate for the past six months, which aligns with the beginning of the pandemic lockdowns. For the six months prior to that, growth was flat, so the index had already been decelerating. This LEI report wasn’t outstanding, with growth progress decelerating, but points to the recovery process taking longer than some had hoped.
(0/-) Initial jobless claims for the Sep. 12 ending week fell by -33k to 860k, but still exceeded the 850k level expected. However, the non-seasonally adjusted results for the one week came in a bit better than the formal seasonally-adjusted figure. Continuing claims for the Sep. 5 week fell by -916k to 12.628 mil., which fell below expectations calling for 13.000 mil. It appeared new claims activity improved in several Southern states, including TX, LA, and GA. Claims overall remain stubbornly high, based on the sectors (hospitality, food/beverage, etc.) that continued to operate in a limited capacity.
Have a good week.
Ryan M. Long, CFA
Director of Investments
FocusPoint Solutions, Inc.
Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, First Trust, Goldman Sachs, Invesco, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.
Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.