Hello, this is Jeff Korzenik, chief investment strategist of Fifth Third Bank with the Economic Beat for the week of November 1st, 2020.
It is of course election week in the United States, and we expect markets to focus almost exclusively on the outcome of the presidential election and the races that will determine the control of the Senate. Before we provide a context for investors to frame the week’s coming events, let’s review last week’s returns and economic releases.
The initial estimate for GDP growth in the 3rd quarter was a stunning 33.1% annualized gain, an all-time record albeit not enough to entirely erase all the losses associated with the pandemic-related declines. September data was strong, pointing to momentum even at the end of the quarter, with durable goods orders including business spending, personal income and personal spending all exceeding expectations. The only softness appeared in home sales data, perhaps in response to higher prices. Beyond the 3rd quarter data, the available October numbers suggested that growth is continuing although at a more sustainable pace. Initial and continuing unemployment claims pointed to continued job growth and manufacturing surveys from the Dallas and Richmond Federal Reserve Banks also pointed to economic gains.
Despite the strong data, last week stocks fell across the board, with the benchmark S&P500 registering a sharp 5.6% loss, with the Dow Jones Industrial Average, NASDAQ, small cap indices, value and growth indices all seeing losses in the five to mid-six percent ranges. Markets are forward-looking, and investors registered concern over the surging COVID infection rates across much of the developed world, the failure of Congress to agree on another stimulus package, and general election anxiety. We are reluctant to read too much into the stock market selloff, as other markets offered little clarity: oil and gold prices fell, but bond yields increased, crossed-signals that suggest investors jitters rather than clear expectations dominated trading.
Should investors be worried? At Fifth Third, we see a healthy political appetite for more stimulus and expect a substantial package in the months ahead, although the election will shape the exact timing, size and makeup of a new round of stimulus. The COVID surge is worrisome, but we do not yet see the evidence that the economy will be forced into a full retreat by potential lockdown mandates or voluntary cessation of economic activity. Which leaves the election as our focus. We remind investors that over the long-term, investment markets are driven by long-term global growth, interest rates, inflation and the dollar. Presidential elections, no matter how consequential for us as a nation, rarely impact such factors by much in a given year. Certainly expect changes within the broad markets as regulatory, and legislative changes can create winners and losers within the broad market, and tax changes can have fairly dramatic short-term impact across the market.
Although the election will be the focus—and likely obsession—of investors, there will be important economic releases this week. We will highlight two particularly important measures of whether the third quarter GDP surge is carrying through to the fourth quarter. The October ISM survey of manufacturing purchasing managers released Monday remains one of our best “quick reads” on the important goods-producing sector of the economy. As the week progresses, unemployment claims will take a back seat to Friday’s monthly labor market conditions releases for October. Economists expect nonfarm payroll growth to remain elevated at 600,000 jobs, but slowing from last month’s 661,000 job gain and they expect the unemployment rate to dip another 0.2% to 7.7%. We’ll dig deeper into that report, looking at two areas of particular concern—the growth of long-term unemployment and the departure of women from the workforce.
As always, we’ll be watching, and reporting back to you next week.