Exhale – November 9, 2020

Stocks surged as investors breathed a sigh of relief that the darkest predictions of election-day chaos didn’t materialize. From the narrow vantage point of the market, the aftermath of the election was relatively smooth on the surface, even if a winner was not immediately declared. 

Investors also appeared to warm to the prospect of gridlock and divided government. While control of the Senate hasn’t been decided, a Republican majority, if it were to occur, would likely block Democratic plans to hike corporate taxes and tighten regulations, assuming a Biden presidency. A rise in the capital gains rate is probably off the table, too. But a big stimulus bill is less likely.

What we saw last week was a relief rally. It’s a short-term dynamic.

Lingering election uncertainty can’t be ruled out. And Covid cases in the U.S. are rising, which could slow spending by consumers if social distancing restrictions return. Yet, investors are also eyeing a vaccine, which ultimately could put the pandemic behind us.

Eventually, investors will put the election in the rearview mirror. What matters over a longer period are the economic fundamentals, namely, economic growth, corporate profits, interest rates, and Federal Reserve policy.

The labor market continues to heal

On Friday, the U.S. BLS reported that nonfarm payrolls rose a strong 638,000 in October vs 672,000 in September. Private sector payrolls jumped 906,000. A drag from fewer workers in education and layoffs of temporary census workers accounted for most of the difference.

Meanwhile, the unemployment rate fell from 7.9% in September to 6.9% in October, a much better-than-expected reading.

Virtually no one had expected the jobless rate to fall below 7% this quickly. Yet, we’re not back to pre-Covid levels, and progress from many economic reports suggest that growth is moderating.

Of course, we shouldn’t expect the record growth we saw in Q3 to continue, but we are moving in the right direction.

Created 2020-11-09 15:09:26