An October surprise
It may not matter all that much to the market.
“Titanic news overnight” was how one of my Wall Street research houses described news that President Trump tested positive for Covid-19. Hopefully that that will turn out to be an overreaction. Strategas Research notes the initial reaction from investors to Trump’s Covid news is it slows the reopening process and increases odds of a Democratic sweep. If Trump weathers this in two weeks with no major conditions, maybe some of that sentiment reverses. Trump quarantined with a Twitter account could be interesting. He definitely will command the news cycle, making him even more the object of fascination and attention. It may even give him an opportunity to rebrand himself as a sympathetic character, Trend Macro says. Hmm. Don’t think I’ll bet on that. The next presidential debate is scheduled for Oct. 15, a town hall meeting with undecided Florida voters. Now, if it happens, a likely virtual debate, after many voters will have already cast their ballots. What else could go wrong for President Trump?
How much should the market care whether it’s a Biden or Trump White House? It gets stimulus either way. The spread between the October and November VIX continues to widen on contested election worries (it’s now consensus) and gapped further on President Trump’s Covid news. But if the market is prepared for the risk, is it a risk? The macro backdrop remains bullish, with abundant liquidity and a “V”-shaped rebound that has pushed economic activity to about 5% below pre-coronavirus levels (more below). The pandemic is still constraining spending on certain services but unless Covid cases spiral out of control, the sector’s recovery should continue. Some suggest that Trump contracting the virus will help by spurring more mask wearing and social distancing. Hmm. Evercore ISI said the overnight developments did nothing to disrupt its upside view on stocks into year-end and 2021. Applied Global Macro Research expects above-trend growth next year, with unemployment falling unusually fast to 4.6%.
That first debate was sort of lame, though I rather enjoyed it with my kettle corn. Regardless, polls show 90% of the population already have made up their minds. Trump knows this and his strategy might have been addition by subtraction—keeping undecideds and marginal Biden supporters in bed on Election Day (or from properly filling in mail-in ballots) while counting on his rock-solid base. Now what?? As good luck would have it, debates usually don’t turn the election anyway. Trump lost all three to Clinton and still won, and the perceived winners of four of the past five first debates (Hillary Clinton, Romney, Kerry, Gore) went on to lose. Moreover, at this juncture in 2016, Trump was behind in the polls even more than he is now both nationally and in the battleground states of Arizona, Florida, Michigan, North Carolina, Pennsylvania and Wisconsin, all of which he won. Four years ago, Trump greatly benefitted from FBI Director Comey’s reopening of Hillary’s e-mails in the final weeks of the campaign. We got one October surprise today, which at first glance doesn’t look good for Trump—betting markets are treating his diagnosis similarly to how Lehman’s collapse accelerated the blue wave for Democrats in 2008, placing a 66% probability on a Biden win and 60% odds of a Democratic sweep. This year cannot get any crazier, can it?
- It’s the economy, stupid! Remember James Carville? Reports this week showed department store same-store sales at new recovery highs, the pending home sales index at record levels, private residential construction accelerating, the Chicago PMI surging to its highest in almost two years and economic activity increasing in 48 states, the widest share since pre-pandemic January. After collapsing at a 31.4% annual rate in Q2, real GDP is forecast to rise at a 32% rate in Q3, according to the latest Atlanta Fed forecast.
- The economy! At 661K, September nonfarm job gains disappointed but the weakness was concentrated in education at the state & local government levels and a drop in Census workers. Business payrolls actually rose and the jobless rate declined. ADP’s private payroll survey jumped an above-consensus 749K, with the gains from all firm sizes and most industries.
- Consumers will determine if the V continues Conference Board consumer confidence jumped 15.5 points in September, the most since April 2003, led by a surge in expectations on an improving outlook for business conditions and jobs. Final Michigan sentiment for September also surprised to the upside. Consumer spending rose again in August, though at a slower pace than outsized increases earlier in the recovery, as the end of extra jobless aid began to bite (more below).
- Does Trump getting Covid equal more stimulus? U.S. household income fell sharply in August, solely due to expiring extra unemployment benefits. Income still remained higher than it was in February, before the pandemic, and the personal savings rate slipped but, at 14.1%, was almost double its pre-pandemic level, lifted in part by federal stimulus checks and the additional jobless benefits that ended in July. At this writing, Democrats and the White House were still talking about a possible new round of stimulus. It’s thought this morning’s Covid news on Trump could spur a deal. Huh?
- Jobs growth cooling, not a good sign Challenger job-cut announcements rose last month to nearly 119,000, more than double their pre-pandemic level. Year-to-date, layoff plans have totaled 2.082 million, exceeding the 2001 record of 1.957 million, with more than half attributed to Covid. The layoffs have caused jobless-claim declines to moderate at still-elevated 51-year highs.
- I’m not buying it If this morning’s news leads to a $1.6 trillion relief package and a Democratic sweep, it could cause a sharp move in rates and inflation expectations, ISI says. Core PCE prices rose faster than expected again in August, though at just 1.6% year-over-year, it’s still well below a 2% target that the Fed says it will allow to run above for some time.
Did you know? Bank of America shares that the term "October surprise" was coined by William Casey when he served as campaign manager of Ronald Reagan's 1980 presidential campaign.
‘Worst presidential debate ever’ has happened before While Tuesday’s debate was derided as a chaotic spectacle by some, the 2008 debates between Obama and McCain were seen as the “most vicious in U.S history,’’ TIS Group notes. The 1800 election between John Adams and Thomas Jefferson led a partisan newspaper editor at the time to refer to Adams as a “hideous hermaphroditical character, which has neither the force and firmness of a man, nor the gentleness and sensibility of a woman." Theodore Roosevelt turned on his former close friend William Howard Taft in the 1912 election, labeling him a “fathead with the brains of a guinea pig.”
Debate winner? Alcohol, according to the internet searches, TIS shares.