It’s the holiday season… and it will certainly feel a bit different this year (if November’s payroll report is any indication). Employers added 245,000 jobs last month. Government payrolls shrank by 99,000 and the private sector picked up the slack with an incremental 344,000 jobs. The official unemployment rate fell 0.2% to 6.7%; meanwhile, U6 remains quite elevated relative to the official rate at 12.0%. From an overall employment standpoint, we are still 9.8M jobs below February levels. The November labor force participation rate came in at 61.5%, underscoring the reality that many “temporary” layoffs are becoming permanent. If there is a silver lining in today’s figures, it is that hourly earnings increased 0.3% MoM and 4.4% YoY. So, American incomes are holding up quite well, despite an otherwise dimming hiring picture in the labor market. Hiring activity among American retailers certainly caught our eye. November is ordinarily a bright spot on the calendar for retail; however, employers actually shed 35,000 jobs. A counterbalance emerged from within the transportation and warehousing space; this sector posted 145,000 new jobs in November. The readthrough, of course, is that Christmas will feel much like the rest of our “stay at home” 2020. No surprise here, so please enjoy your holiday season and stay healthy.
While the jobs report ordinarily garners a tremendous amount of attention (and scrutiny) each month, the real story today centers around the likelihood of fiscal stimulus. Was today’s report “bad enough” to move Congress closer to a deal? Certainly, jobs growth is slowing; nevertheless, the labor market is still expanding albeit at a slower pace. Much of this “slowing” can be attributed to the spike in coronavirus cases (stateside AND abroad) and waning stimulus from the Cares Act. With the prospect of multiple vaccines now on the horizon, Mr. Kudlow, Director of the US National Economic Council, has repeatedly stated, “Help is on the way.” A vaccine certainly increases the likelihood of a return to some form of normal and explains the recent “catch up” trade in more economically sensitive (i.e. cyclical) sectors. Simultaneously, it does seem that consensus is emerging (again) regarding the need for some form of fiscal stimulus to juice the domestic economy. However, will there be a deal before the January 5 elections in Georgia? We think the likelihood of a deal is greater now than it was in the fall, but based on our metrics, the S&P 500 is currently pricing in a package of ~$1T and the benefit of a vaccine rollout at 3700. Therefore, we have a bit of curbed enthusiasm regarding the impact of a fiscal package and will be looking more closely at earnings season to start 2021.
The US dollar has continued its decent relative to peers. Meanwhile, the steepness of the US yield curve, as measured by the 2-10 spread, is in roughly the same place as it was the day Pfizer (PFE) announced the expected efficacy of its vaccine. We have had several more positive announcements on the vaccine front over the past couple of weeks. Janet Yellen has been tapped to take the reins as treasury secretary and the wheels on Capitol Hill are in motion regarding aid for the slowing US economy. Moreover, the odds seem to favor a split Congress. What a difference a month can make! All that to say, there is a lot of “good” priced in at these levels in financial markets and a split Congress is not guaranteed. So, in our view, a bit of caution is warranted as we move into year end. In recent days, we have booked some profits in our more cyclical, higher-beta tactical allocations and will look for more opportunities to present themselves in the coming weeks. Strategically, we continue to favor large cap US equities. Happy holidays to you and yours!
Market Outlook: Bearish USD, Neutral Duration, Neutral Equities
News Release: Bureau of Labor Statistics (The Employment Situation- November 2020)