Election Surprises and Stock Markets

Last week (What Would Spook Markets?), I focused on recent research conducted by economists Eric Zitzewitz and Justin Wolfers, which concluded that a Trump victory would “reduce the value of the S&P 500, the UK, and Asian stock markets by 10-15 percent...and would significantly increase expected future stock market volatility.” There may be some proof to this thesis: As Trump’s numbers have improved, stocks have responded in kind by dropping: the S&P 500 has dropped for nine consecutive sessions, for a total of a 3.1 percent slide. The numbers still favor Clinton, but this has been a strange year, so it is worth looking back to other presidential shockers. 68 years ago, Republican Thomas Dewey was thought to be the favorite and according to analysts at Capital Economics, “the polls caused the stock market to rally in the weeks leading up to the election. However, the shock re-election of incumbent President Harry Truman caused the S&P 500 to fall by more than 10 percent over the next two weeks.”

Finally, given Trump’s vow to fight the results, if the race is close, it is instructive to consider how a contested election result might play out for investors. In 2000, when the country had to wait for the Supreme Court to weigh in on a recount, there was a clear negative market reaction: stocks dropped by almost 5 percent during the week after the election and remained volatile during the 36-day period after polling day.

October Jobs Report:The labor market recovery continued in October, as the economy created 161,000 jobs and the unemployment rate edged down to 4.9 percent, mostly in line with expectations. Beyond the headlines, there were three positive data points in the report: the August and September results were revised higher, bringing the average monthly gain for 2016 to 181,000 jobs; average hourly earnings rose, pushing up the annual increase by 2.8 percent, the fastest monthly growth since June 2009 and an especially impressive number, considering that inflation is running at about 2 percent; and the broader measure of unemployment, which includes those who have stopped looking for jobs and those working part-time for economic reasons fell to 9.5 percent, the lowest level since April 2008. (Note: Although a lot of Americans are working part time, almost all of the 11 million jobs added since the recession officially ended in mid-2009 have been full-time positions.)

At the Federal Reserve policy meeting last week, the central bankers noted that “the case for an increase in the federal funds rate has continued to strengthen, but decided, for the time being, to wait for some further evidence of continued progress toward its objectives.” Consider the October jobs report as further evidence that will help bolster the Fed’s case for a quarter-point interest rate increase at the December 13-14 meeting. Traders are betting on it…according to the futures markets, there’s a 75 percent chance of that outcome.

MARKETS:

• DJIA: 17,188 down 1.5% on week, up 2.7% YTD
• S&P 500: 2085, down 1.9% on week, up 2% YTD (9 consecutive losing sessions, longest losing streak since Dec 1980)
• NASDAQ: 5046, down 2.8% on week, up 0.8% YTD
• Russell 2000: 1163, down 2% on week, up 2.4% YTD
• 10-Year Treasury yield: 1.77% (from 1.85% week ago)
• British Pound/USD: 1.2518 (from 1.2186 week ago)
• December Crude: $44.17, down 9.5% on week
• December Gold: $1,306.90, up 2.2% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.22 (from $2.22 wk ago, $2.21 a year ago)

THE WEEK AHEAD:

Mon 11/7:

3:00 Consumer Credit

Tues 11/8: Election Day

CVS, News Corp

6:00 NFIB small-business optimism index

10:00 Job Openings and Labor Market Turnover (JOLTS)

Weds 11/9:

Viacom, Wendy’s

Thursday 11/10:

Kohl’s, Macy’s, Walt Disney

Friday 11/11: Veterans Day: Bond Markets and Banks CLOSED, Stock markets OPEN

10:00 Consumer Sentiment

Tired Stock Markets and Fed Fatigue

I'm tiredTired of playing the game Ain’t it a crying shame

-Lili Von Shtupp (Madeline Kahn) in “Blazing Saddles

One thing we can all agree on this political season is that everyone seems tired -- tired of the shouting, the rhetoric and the divisiveness. In some ways, the stock market also feels a bit tired right now, as investors continue to suffer from Fed fatigue. After enduring a correction early in the year, then charging to all-time highs over the summer, the rally seems to have lost some steam lately. Perhaps the slowdown is for good reason, at least from the consumer’s point of view: with the labor market tightening, US companies are paying higher wages, which eats into their profit margins and hurts stock performance. Most Americans would likely happily endure so-so mid-single digit returns from stocks in their retirement plans, in exchange for fatter paychecks.

Conversations about the Federal Reserve also seem a little wearing these days. The Fed’s impact on risk assets, like stocks, seems to wax and wane from week to week, with most now believing that the central bank will raise rates by a quarter of a percent at the mid-December meeting. By that time, investors will know the outcome of the election and will also have a bit more data to confirm that economic growth can withstand a Fed move. This week, the government will release one of the last few important reports before that meeting: third quarter Gross Domestic Product (GDP).

After a dreadful first half of the year, when the economy expanded by just about one percent, growth has accelerated in the second half of this year, as the effects of a stronger dollar and lower oil prices have started to fade. Economists expect that the first estimate of third quarter growth will rebound to an annualized rate of 2.5 percent, due in large part to a surge in exports and specifically soybean exports. Depending on how the Bureau of Economic Analysis handles the spike and then likely reversal in the subsequent quarter could impact the headline. When it’s all smoothed out, we should expect that growth for all of 2016 will be the same, tired 2 percent or so that we have seen over the past few years.

In addition to GDP, which will be revised in a month, the Fed will also chew on the following before the December FOMC: two employment reports (11/6 and 12/4), two Personal Income and Spending reports, which contain the Fed’s favorite measure of inflation, PCE Index (10/31 and 11/30) and one more Consumer Price Index report (11/17). Presuming that these reports are mostly in line with trends, the Fed should hike in December. After that, I'm afraid to tell you that we're likely to endure another round of exhaustive speculation about the pace of rate hikes…in other words, be prepared for the 2017 version of Fed fatigue.

• DJIA: 18,145, up 0.04% on week, up 4.1% YTD
• S&P 500: 2141, up 0.4% on week, up 4.8% YTD
• NASDAQ: 5257, up 0.8% on week, up 5% YTD
• Russell 2000: 1218, up 0.5% on week, up 7.2% YTD
• 10-Year Treasury yield: 1.74% (from 1.80% week ago)
• British Pound/USD: 1.2227 (from 1.2188 week ago)
• November Crude: $50.85, up 1% on week
• December Gold: $1,267.70, up 1% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.23 (from $2.25 wk ago, $2.22 a year ago) Prices have climbed above their year-ago levels for the first time in over two years (7/13/14)

THE WEEK AHEAD:

Mon 10/24:

Visa

8:30 Chicago Fed National Activity Index

Tues 10/25:

Apple, AT&T, General Motors, Pandora

9:00 FHFA House Price Index

9:00 S&P Case-Shiller HPI

10:00 Consumer Confidence

Weds 10/26:

Coca-Cola, Groupon, Texas Instruments

10:00 New Home Housing Sales

Thursday 10/27:

Amgen, Deutsche Bank, Ford, Sirius XM

8:30 Durable Goods

10:00 Pending Home Sales

Friday 10/28:

Exxon Mobil, Hershey, MasterCard

8:30 Q3 GDP – 1^st Estimate

8:30 Employment Cost Index

10:00 Consumer Sentiment

Aug Jobs Report: Federal Reserve Rate Hike off Table

It looks like the Federal Reserve will not need to act its upcoming FOMC policy meeting in a few weeks. The Labor Department reported that the economy created 151,000 jobs in August and the unemployment rate remained at 4.9 percent. Because June and July showed robust gains of over 270,000 each, the three-month job average now stands at 232,000. But for all of 2016, there has been an average of 163,000 jobs added per month, well below the nearly quarter of a million monthly pace of the past two years.

While economists say that the fall off is expected in the eighth year of a recovery, taken together with the recent slowdown in manufacturing and persistently low inflation, the Federal Reserve will likely put an interest rate increase on the back burner until December. According to the futures markets, traders see just a 12 percent chance of a hike at the September meeting, down from 27 percent before the announcement. Odds of a December increase are 50-50.

The report also highlights a divide between economists about the state of the US economy. Paul Ashworth of Capital Economics noted, “There is a long history of the initial August payroll estimate coming in below consensus expectations and then being revised higher” and the firm has been upbeat about the state of consumer spending and its ability to propel growth in the second half of the year.

Stephanie Pomboy of MacroMavens believes the situation is more problematic. Last week, before the unemployment report was released, she told the New York Times, “After the bursting of the housing bubble and the Great Recession, there has been a generational shift away from spending toward saving among consumers. The great consumer credit boom of the 1980s, 1990s and 2000s is over…this new impulse to save leads to a sluggish pace for growth.”

Regardless of which side wins the long-term intellectual battle, the fact that both growth and inflation remain so low, in the short term we know that the Fed will not raise rates at least until December.

Mon 9/5: LABOR DAY…US MARKETS CLOSED

Tues 9/6:

9:45 PMI Services Index

10:00 ISM Non-Mfg Index

Weds 9/7:

10:00 Job Openings and Labor Turnover Survey

2:00 Fed Beige Book

Thursday 9/8:

3:00 Consumer Credit

Friday 9/9:

Solid Jobs Report = Fed Rate Hike

The government said that the U.S. economy added 211,000 jobs in November, which was the high-end of the predicted range of 160,000-220,000. There is now little doubt that the Federal Reserve will raise short-term interest rates when it meets in a week and a half. The three-month average of job creation stands at a solid 218,000 and year-over-year, 2.64 million jobs were added. Although 2015 average monthly job creation of 210,000 is less than last year’s strong pace of 260,000, it has certainly been strong enough to push down the unemployment rate from 5.8 percent a year ago, to a seven-year low of 5 percent. The broader measure of unemployment, which includes those who have stopped looking as well as those working part-time for economic reasons, edged up slightly to 9.9 percent, though remained under the key 10 percent level for a second consecutive month.

The Fed is also likely to be encouraged by the breadth of job gains, including the domestic-focused construction, retail and health care sectors. That said, two areas that continue to be under pressure are mining and manufacturing, both of which have been struggling under the triple whammy of lower oil prices, weak demand overseas and a stronger U.S. dollar. Another area of weakness is the still low level of working-age Americans who have jobs or are actively looking for work. The participation rate edged up to 62.5 percent, due to a 273,000 increase in the labor force, but because of demographics and the large number of would-be workers giving up their job searches, participation remains near 40-year lows.

Back to the good news...after a swift 2.5 percent annual increase in October, wages in November were up a still-respectable 2.3 percent from a year ago. In a separate report released by the government earlier last week, Q3 hourly compensation jumped by 4 percent in the third quarter, on an annualized basis and was up 3.6 percent compared to the same quarter a year ago. If that trend holds, hourly compensation is on track to rise by the largest amount since 2007 and when adjusted for inflation, the increase would be the fastest since 2000.

Overall, the results confirm that the economy continues to expand; the labor market is improving and workers are gaining leverage; and the Fed will soon hike interest rates for the first time in over nine years.

MARKETS: The US jobs report, along with promises of “no limit” on additional ECB stimulus measures, was enough to save what was shaping up to be a losing week.

• DJIA: 17,847 up 0.3% on week, up 0.1% YTD
• S&P 500: 2,091 up 0.01% on week, up 1.6% YTD
• NASDAQ: 5,142 up 0.3% on week, up 8.6% YTD
• Russell 2000: 1183, down 1.6% on week, down 1.8% YTD
• 10-Year Treasury yield: 2.28% (from 2.22% a week ago)
• Jan Crude: $39.97, down 4.2% on week
• Feb Gold: $1,084.10, up 2.6% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.05 (from $2.09 wk ago, $2.79 a year ago)

THE WEEK AHEAD: December 9^th marks the 50^th anniversary of the debut of “A Charlie Brown Christmas”. The image of the sad little Christmas tree that Charlie and Linus selected may be a good symbol of the U.S. economy. At first glance, it seems a little thin and wobbly, but upon further reflection, it’s not “such a bad little tree. It's not bad at all, really. Maybe it just needs a little love.”

Mon 12/7:

Tues 12/8:

6:00 NFIB Small Business Optimism

10:00 Job Openings and Labor Turnover (JOLTS)

Weds 12/9:

Thursday 12/10:

8:30 Import/Export Prices

Friday 12/11:

8:30 Retail Sales

8:30 PPI

10:00 Business Inventories

10:00 Consumer Sentiment

Job Creation Surges; Rate Hike Back on Table

It’s never as good or as bad as you think. For the past few months, there has been a chorus of downbeat chants that the U.S. economy is headed for a downturn and that the job market was the leading indicator of the coming storm. The Cassandra’s cited the weak job creation numbers in August (+153,000) and September (+137,000), a sizable pullback in manufacturing and the much-feared hard landing in China. These doubters said that the Fed would have to wait at least until March 2016 to raise rates, in order to determine whether the slowdown was temporary or longer lasting. All of that changed when the government released the October employment report. The labor market bounced back in October, adding 271,000 jobs. It was the best pace of hiring this year and well ahead of the consensus estimate for 180,000. With this report, the three-month average increased by 20,000 a month to 187,000 and the 12-month average stands at 230,000.

The unemployment rate edged down to 5 percent, the lowest level since April 2008 and the broader measure of unemployment, which includes those who have stopped looking as well as those working part-time for economic reasons, edged down to 9.8 percent. While that’s still a hefty number, it is the first time that it's been below 10 percent since May 2008. And average hourly earnings increased by 2.5 percent from a year ago, the fastest year-over-year pace since 2009. If maintained, the extra money could potentially help consumers feel more economically secure and spend more freely.

Before you start the celebration, there is no doubt that the jobs market is not a-ok for everyone. Manufacturing has slowed down, due to plunging energy prices, weakness in China and the emerging markets and a strengthening U.S. dollar. One manufacturing executive based in MN, told me that the sector was in “a second recession.” Indeed, various indicators show that output, although still barely positive, is at the weakest pace since 2009. But there are signs of improvement on the horizon: there has been evidence of a near-term bottoming of Chinese (the Shanghai Composite has gained more than 20 percent since its low in late August) and other emerging economies and commodity prices have stabilized.

In fact, the firming global situation, along with the stronger than expected jobs report, now puts a December Fed rate hike back on the table. Just two weeks ago, the futures markets saw only a 30 percent chance of a December lift-off. A day before the jobs report, that number was over 50 percent and moments after the BLS release, it jumped to over 70 percent.

But as a reminder, the month-to-month numbers can change on a dime and it is really never as bad or good as you think…although the economy appears to be firming, sentiment could quickly sour again. For now, enjoy the good news.

MARKETS:

• DJIA: 17,910 up 1.4% on week, up 0.5% YTD (6th consecutive weekly gain, up nearly 10% during that period…largest six-week gain since 2012)
• S&P 500: 2,099 up 1% on week, up 2% YTD
• NASDAQ: 5,147 up 1.9% on week, up 8.7% YTD
• Russell 2000: 1200, up 3.2% on week, down 0.4% YTD
• 10-Year Treasury yield: 2.32% (from 2.09%)
• December Crude: $44.29, down 5% on week
• December Gold: $1,087.70, down 4.7% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.22 (from $2.18 wk ago, $2.95 a year ago)

THE WEEK AHEAD:

Mon 11/9:

Tues 11/10:

6:00 NFIB Small Business Optimism

Weds 11/11:

Thurs 11/12:

10:00 Job Openings and Labor Turnover Survey (JOLTS)

Fri 11/13:

8:30 PPI

8:30 Retail Sales

10:00 Consumer Sentiment