Monday Musings: November 2, 2020

Nov 02, 2020

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Public Trust Credit Team
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In the latest economic news...

The U.S. real GDP grew at an impressive annualized rate of 33.1% in Q3 2020 relative to the second quarter as the economy reopened following the lockdowns. Still, the economy has yet to fully rebound to the pre-pandemic levels, as real GDP remains 3.5% below its Q4 2019 peak. As a reminder, real GDP contracted by 5% in Q1 2020 and faced a material 31.4% collapse on an annualized basis in Q2 2020 as the economy essentially shut down. This strong growth in the third quarter was driven by a 40.7% surge in consumer spending. Interestingly, real personal spending on durable and non-durable goods have both exceeded their pre-COVID peaks as the economy reopened, but real spending on services was 7.7% below its Q4 2019 level as it often requires more interpersonal contact.
 
Initial jobless claims fell by 40k, reaching 751k for the week ending October 24 and marking the lowest level since mid-March. However, the Wall Street Journal pointed out that new claims recorded that week were still more than three times the weekly pre-pandemic average, suggesting that the layoff trend is not yet over. The unemployment rate remained stubbornly high at 7.9% for September in contrast to the 3.5% recorded in February.
 
Although real GDP grew at a record pace in the third quarter, the economy faces a lot of headwinds and uncertainty in the months ahead. Market participants continue to focus heavily on the daily virus infections rate – which has now reached new highs – and eagerly await news on the fiscal stimulus front as well as the results of the November election.

Cases of COVID-19 continue to climb across the globe with several nations announcing stricter measures

COVID-19 cases have spiked worldwide over the last month, leading countries to reexamine containment measures. In the U.S., several weeks of rising cases have lead the case count to hit 77% of the prior peak with hospitalizations increasing as well. Several cities and countries across the U.S. have announced stricter measures though only one county thus far has opted for a full lockdown. While worrisome, there is evidence that this wave is more focused on rural areas rather than city centers, meaning that the areas of highest economic production are likely to fare better than in March.
 
Across the pond, several European countries have announced lockdowns or stricter measures. France, Great Britain, and Greece announced full lockdowns for the second time this year in which citizens can only leave their homes for essential services, while Germany, Belgium, and Italy announced partial lockdowns including the closures of many non-essential services and heavy restrictions on dining. The second wave in Europe will likely have a detrimental effect on the EU economy and further complicate Brexit negotiations. Most countries’ lockdowns extend until December 1, 2020, setting the stage for an important global retail buying season ahead of the Christmas holiday.

Market readies for election day and potential changes to policy

With the presidential election nearing its conclusion, political prognosticators and media reports are driving market sentiment. Data from both Fivethirtyeight.com and Realclearpolitics.com currently favor former Vice President Joe Biden to win, but nothing can be said with certainty at this point. No matter who the victorious candidate is, the market expects a fiscal stimulus bill will be a high priority. Beyond the presidency, the potential for a change in the Senate is also heavily analyzed. In a note today, JP Morgan offered a brief summary of several scenarios:
  • Blue wave – should former Vice President Biden win and the Democrats claim a majority of the Senate, the market expects tax increases and a large stimulus package.
  • Biden wins, but the Senate maintains a GOP majority – we may not see tax policy changes, but there is a possibility of fiscal stimulus.
  • Trump wins, but the Democrats take the Senate – fiscal stimulus is expected with the potential to be larger than the current Senate proposal; disagreement amongst policy makers could also result in continued grid-lock, meaning the existing tax regime may remain in place.
  • Trump wins with a GOP Senate – “status quo” scenario with a potentially larger fiscal package than under the Biden/GOP Senate scenario plus possible expansion of existing tax policies.
Regardless of the outcome, many market participants are steeling themselves for a noisy and potentially contested period after the election. As a result, volatility and uncertainty could remain prominent market themes in the near future.
 
For money market investors, there will also be questions about the future of the Federal Reserve’s asset purchases and longer-term policy direction. While there are two existing vacancies and potentially more if a Fed Governor joins the winning Administration, the Fed Board should provide a semblance of continuity due to the two-year continuation of Chairman Powell’s term (which ends in 2022).
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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