It's been hours now, several hours since the nation learned that President Donald Trump and the First Lady had tested positive for the coronavirus that causes Covid-19. That news came just a few hours after learning that Trump advisor Hope Hicks had contracted the virus and was symptomatic after travelling with the president. Questions swirled. Uncertainty impacted markets. Who is in line for succession should the president become ill? Who among the president's inner circle, including those possibly in line had been exposed? Risk Off.
Friday morning. The Bureau of Labor Statistics releases its September Employment data. The numbers are mixed. The takeaways, though supported by some positive headline numbers, are seen as disappointing. Disappointing as has been a number of recent macroeconomic data-points. We have witnessed one very ugly debate between the two major party nominees for president come November 3rd. While it becomes unlikely that we will see a second or third debate, there is no debate that the robust economic recovery that was supported by aggressive monetary and fiscal measures, is now moving sideways.
About That Jobs Report
There are caveats. That, as a statistician, as an economist, must be acknowledged. Non-Farm Payrolls badly disappointed at 661K, Expectations had been for a rough 850K. Broken down just a little bit though, we see 877K private jobs created which was slightly above consensus, while government payrolls showed a contraction of 216K. Temporary employees connected to the census? Maybe some connection to "learning from home" education? Even if there are not fewer teachers required to teach more students remotely, there are surely fewer folks required to work within the infrastructure of education. From bus drivers to administrative employees to custodians. This potential impact hits home directly where the "seasonal adjustment" ramps up due to the demands of going back to school.
Does that mean that the report is not so disappointing? No, but it is a reason, and it is exacerbated by the adjustment. The civilian labor force still shows a nasty contraction, reducing participation. This is the reason why the unemployment rate fell to 7.9% and the underemployment rate fell to 12.8%. So, I am still disappointed. That 661K number comes from the Establishment survey (Table B). That is the monthly number for job creation that the media likes to use. The Household survey (Table A) shows the number of unemployed growing only 275K for September. These numbers often do not match up, but the fact that the better of the two presents far better than the latter, but still well below analytical expectations... is telling.
Earlier this week, August data for personal income/spending caused economists to see some flashing yellow lights against the backdrop of a hotter than anticipated inflationary environment. Sure, consumers have been showing more confidence, there has been more construction, and housing is booming. Can those trends continue without increased fiscal support? Probably not. (Certainly not) Can housing stay hot? Sure, urban dwellers are trying to get out of the cities as some areas descend into chaos and violence, and supply becomes constrained as nobody seems to be interested in going the other way. Still, the banks have to participate, and it seems inevitable that the banks will likely have to pull back on the extension of credit on the consumer side. Banking is a business after all.
What Does It All Mean?
One month ahead of a national election, the incumbent who is trailing in the polls, will likely be unable to campaign. Depending on how he feels, winning another four years may be the last thing on his mind. We don't really know. Everyone who gets sick from this virus recovers quite differently, and if stricken with post-Covid Syndrome, then who knows? Then we're talking several months, at a minimum.
Does this play into former Vice President Biden's hands for the election? The slowing economic recovery? Yes. Congress could help there. Perhaps they will, on their terms. The president testing positive and according to the morning news reports starting to show some mild symptoms? I don't know and I don't think Joe Biden wants to be perceived as winning that way anyway. Especially since he may have very well won this election had this morning's events not unfolded in this way.
As for the impact of a Biden presidency on economic recovery, it could be profound. The former vice president is proposing taking the statutory corporate tax rate up to 28% from the current 21%. The former vice president is proposing taking the long-term capital gains tax for big earners up to 39.6% from the current 23.8%. That's huge, and should Vice President Biden be elected, will cause an avalanche of selling across financial markets this calendar year in order to pay President Trump's tax rates. If, and I mean if the Democrats take back the Senate. Should the legislature remain split, this could shake out differently.
There are those on Wall Street that expect the S&P 500 to face a tough 10% to 15% reduction in potential annual earnings due to increased taxation and regulation should the election result in this way. One of my favorites, Amazon (AMZN) would certainly get hit as a 15% minimum tax is an idea being floated toward companies that find ways to reduce federal tax payments below that level.
From my point of view as an investor, the only thing worse than a sweep by either party of both the Executive and Legislative branches of government would be a contested outcome. Let's hope that does not happen.
Short-term market performance probably relies upon Speaker Pelosi and Secretary Mnuchin playing ball cordially, today. Longer-term, if one believes that the former vice president will be number 46, then the safer bets may be in hospital stocks and health insurers. That's who benefits most under the Affordable Care Act known simply as "Obama Care" which would likely broaden as opposed to being challenged legally.
Other than that, you know I'll always see large cap tech as the one slice of this market that succeeds in both tough and robust economies. Software over Semis in my opinion.