Gridlock: Good for Stocks, Bad for Stimulus?

Time for a color check: The Red Mirage (the apparent dominance on election night of President Trump) did occur, but the Blue Wave (Democratic majority in the Senate, State Houses and the presidency) did not. Investors cheered the likely outcome of a Biden presidency, a Republican-controlled Senate and a Democratic controller House, believing that gridlock would amount to a win for corporate America.

After the worst week since March, stocks soared election week and recouped all of the previous week’s losses. The rally makes sense in the short term because with divided government, it is unlikely that there are going to be enough votes to enact a tax increase on corporations or on the top two percent of individuals.

And any potential increase in regulation for the energy, financial services, or health care sectors could be outweighed by a reversal of the trade war with China.

While gridlock might be good for stock investors, what about the overall economy? On that front, the news is mixed. As Federal Reserve Chair Jerome Powell noted in last week’s post-FOMC presser, “the path of the economy will depend significantly on the course of the virus,” and he said the recent rise in cases “is particularly concerning.” And yet, there has still been no action on another round of stimulus, which has helped the economy recover to where it is today.

Perhaps the fever will break post-election. Fresh off his winning another 6-year term, Senate Majority Leader Mitch McConnell said Congress should focus its energy on approving a new coronavirus stimulus bill “by the end of the year.” And despite his April remarks, where he noted, “There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations,” he now believes that the next round of money would possibly “do more for state and local governments.” That would be a relief, because without any more money, 5.3 million workers could lose their jobs by the end of 2021 if municipalities don't get a bailout, according to the Economic Policy Institute.

Meanwhile, the labor market continued to add jobs in October, though at a slower pace than the June peak. 638,000 jobs were created during the month and the unemployment rate dropped full percentage point to 6.9 percent, and for the right reasons: more people entered the labor force and many of them got jobs. With the sixth consecutive month of gains, the labor market has recouped about 12 million of the 22 million jobs lost due to the pandemic.

Before creeping into Cassandra territory, overall, the October report was a good one. But there are still problems, including:

The pace of job growth is slowing down
Despite the gains, there are still 10.1 million fewer jobs than in February. The losses are still 15 percent worse than those experienced in 2008-09.
As the number of COVID-19 cases rise, there could be limits to the number of jobs added this winter, especially in leisure and hospitality. Nine percent of businesses planned to lay off workers during Q4 due to the outbreak, according to a Conference Board survey last month.
Long term unemployment (out of work for more than 27 weeks) jumped by 1.2 million to 3.6 million, representing about a third of those unemployed. These workers “tend to get lower paying jobs once they are reemployed and suffer more mental and physical health problems than those who are only unemployed for a short period of time,” says Grant Thornton Chief Economist Diane Swonk.
The number of people who are working part-term instead of full-time for economic reasons jumped by 383,000 to 6.7 million.

With employment growth likely to slow further, the need for additional stimulus is rising. Hopefully, even a gridlocked legislative branch will see the danger that lurks. In addition to the $600/week extra federal benefit, which expired at the end of July, here are the CARES Act provisions that are slated to expire at the end of 2020:

Enhanced unemployment benefits (self-employed/gig workers)
Extended UI benefits (26 to 39 weeks)
Eviction ban
Mortgage relief and forbearance on federally insured home loans
Student loan forbearance on federal loans
Expanded 401 (k) hardship loans and withdrawals