A Laborforce Exodus, Stimulus Uncertainty Weighs on the Markets, and Markets During Election Seasons
The manufacturing recovery may have slowed in September, but we’re still seeing some good numbers from the Kansas City Fed and other regional indices. Covid-induced changes to the workforce remain a major concern as laborforce outflows, hour reductions, and stimulus uncertainty weigh on consumer confidence, which has ticked down amid an apparent third wave of infection. The markets are also feeling the effect of prolonged stimulus negotiations, as well as growing political uncertainty as the election approaches. How have markets historically reacted during election season?
The Growing Need for Stimulus, U.S. Net Equity Supply Grows, and What Lies Ahead for the Bond Market?
The battle over stimulus continues in Washington as many Americans grow increasingly reliant on savings and other non-paycheck measures to cover expenses amid the accelerating shift from temporary to permanent layoffs and the expiration of the Paycheck Protection Program. Over in the equities market, new offerings are outnumbering buybacks for the first time in a decade and the U.S. Net Equity Supply is growing—thanks in large part to the recent IPO boom. And though the yield curve is inching toward “normal,” the situation is complicated by uncertainties around stimulus measures and the Fed’s capacity to cope, given that their ownership of the Treasury market is already at record highs.
American consumers have returned to the retail space with far greater swiftness than expected—September sales growth came in at more than double the Dow Jones consensus estimates—but they may not necessarily be “buying American.” The U.S. trailing 12-month trade deficit has soared to ~$3.12 trillion, enough to put even 2008 to shame. And though we’ve seen some recent signs of strength from the manufacturing sector, the recovery looks to be plateauing. That’s not the case for negative-yielding debt though, which has returned with a vengeance. Is the fixed income space poised for more struggles?
The Philadelphia Fed manufacturing index surged to 32.3 this month, its highest reading since the onset of the Covid-19 crisis, more than doubling both the expected figure and September’s reading of 15. Manufacturing growth has also continued in the New York region and is projected to surge further globally over the next few months, but the services sector is still facing serious struggles. Public debt has surged to historical highs in 2020 and, though it’s yet to spark significant inflation, its presence is sure to be felt in the bond market. And as second (or even third) waves of infection take hold, are global economies prepared to cope?
U.S. CPI grew 0.2% in September—its slowest pace in four months—to 1.4%, directly in line with expectations but again short of the Fed’s 2% target. Still, it’s a rosier picture here than in Europe, where core inflation looks to be cruising downward toward zero. And we’ll say it again: the bond market is under threat. As corporate debt soars, credit risk is climbing, and net issuance is poised to approach record highs. What’s more, bankruptcy filings don’t typically peak until 5-6 quarters after a recession, so these struggles aren’t likely to disappear as quickly as we might hope. Do you have a plan to meet return goals if yields continue to disappoint?
The S&P 500® Index’s 8.5% third-quarter gain was a welcome response to the first half of the year’s histrionics. The quarter had its own volatility as the markets flirted with a 10% correction, but then resolutely continued climbing the proverbial wall of worry. Ultimately, the trends that were in place at the beginning of the quarter continued and little changed.
As we move off the S&P 500® Index’s best week since July, small and mid-caps remain down year-to-date but have gained significant ground in recent weeks. Risk appetite appears to be growing among investors—perhaps unsurprising in a historically low interest rate environment—and we’re noticing a couple of potential trends in yields, but time will tell if they’ll bear out and/or how long they’ll last. Finally, the USD’s recent weakness—it just fell to a 17-month low against the yuan—is giving a boost to commodities. Could it be enough for them to break out from a nearly decade-long downward trendline?
The recovery is rolling on as we enter Q4, but momentum has slowed significantly. Employment in particular looks to be plateauing—another 840,000 Americans applied for first-time unemployment benefits last week. Central banks are struggling to spark inflation, and businesses in need of funding have been issuing a massive wave of new debt. High yield fund flows are elevated, but with corporate bankruptcies brewing and U.S. insolvencies projected to hit 57% in 2021, it could prove a risky prospect.
Global manufacturing growth has staged a massive recovery to hit a ~2-year high, but cost cutting in other nations is causing a headache for the U.S. as the trade deficit surges to $67.1 billion—its highest level in 14 years. As the debate (and messaging) around additional stimulus measures wears on, federal and local government debt has already soared to historic heights and is raising concerns about both inflation and a potential oversupply of muni bonds. Over in Europe, a second wave of infection has taken hold and already dealt a blow to the Eurozone services PMI. Could this further erode the region’s already-shrinking share of global GDP?
Jobs are still coming back, but at a slower pace. Approximately half of the jobs lost since the onset of the pandemic have been recovered, and—while not exactly forming a full V (we see more of a checkmark)—are returning at a significantly faster pace than in past periods of significant losses. State and local governments have seen massive losses to tax revenue in 2020 in a development that could spell trouble for muni-bond investors. And while 10-year UST yields may look strong from a certain angle, the trend likely isn’t sustainable. Do you have an alternative in place?