Lots to cover today! Election day has come and gone (sort of), yesterday was Fed day, and today we bring you jobs. US payrolls expanded by 638,000 in the month of October. Government payrolls shrank, while the private sector picked up the slack. Though October marks the 6th consecutive month of American job creation, there are some concerning signs within today’s nonfarm report and other October economic data points. First, job growth appears to be flatlining as fiscal stimulus runs its course in the domestic economy. Second, wage pressures are abating—MoM hourly earnings gained 0.1%. This is a bit troubling because even as unemployment declined to 6.9% in October, 11.1MM people remain unemployed and the majority of hiring took place in the most virus sensitive sector, leisure and hospitality. It is worth noting here that Covid-19 cases are rising quickly in the states and abroad. Moreover, both the official unemployment rate and the ranks of jobless Americans are currently ~2X pre-pandemic levels. U6 is also hovering just north of 12%. Plenty of wood to chop in the US labor market!
The shape and color of Capitol Hill will directly impact multiple assets and their interlinked relationships. For our part, we will avoid political speculation and focus on the numbers. There are three things to keep an eye on particularly as election results roll in. First, credit spreads. These must remain tight and conducive to value creation within corporate America. So far so good… Amidst all of the political sound and fury, Q3 earnings have been a bright spot. Corporate balance sheets are holding up well and management teams have demonstrated the ability to post solid top and bottom line results even in these challenging times. If we can keep the economic flames burning, then a full recovery in S&P 500 operating earnings by the end of Q3 2021 is not out of the question. Financing (when available) is incredibly cheap. Let’s keep it that way, Jay!
In a 2%-ish growth world, the shape of yield curves becomes increasingly important. This leads us to our second point of interest, the US treasury curve. We are of the mind that a credible cyclical story cannot manifest itself without a meaningful catalyst. The American consumer could be just the spark that the domestic economy needs to trigger a more cyclical recovery, but consumer behavior has been about as difficult to forecast as the path of the coronavirus itself. So, until there is a vaccine, TWP sees a bull flattening of the yield curve as the right medicine for equity markets in the near-term. Of course, rates and economics lead us to currencies.
Lastly, the US dollar likely needs to remain weak relative to developed market peers for risk assets to maintain their upward trajectory. An accommodative Fed and unprecedented deficit spending have proven strong allies against a rising greenback. However, as economic caution signals flash, the onus is on Congress to draft a fiscal package. Mr. McConnell signaled a willingness to work toward a significant fiscal deal as recently as Wednesday morning but time will tell.
Given the heightened level of uncertainty in today’s marketplace, we will game out a couple of possibilities for markets as we head into the holiday period. If we wind up meeting all three of the above criteria, it is feasible for US equities to reach ~3600 by yearend. If one or two of the above objectives are met, TWP’s fair value estimate for equities is 3400.
Market Outlook: Bearish USD, Neutral Duration, Neutral Equities