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Investment Commentary




                                         A Stimulus Stalemate

Markets were rattled last week when President Trump confirmed that he and the First Lady tested positive for COVID-19. The implications and uncertainty surrounding his diagnosis quickly sent stocks lower as news of additional White House staff and members of Congress also testing positive trickled out. The armchair virologists were then out in full force prognosticating the knock-on effects of the President’s diagnosis on both the election and the economy.

That overnight surprise was then coupled with a disappointing monthly U.S. jobs report on Friday morning. Employment creation in September fell short of consensus expectations, amounting to less than half the total for August. The employment recovery is flattening, with only 661,000 jobs added back and the participation rate dropping to 61.4%, which was below all estimates. The labor market is no longer hemorrhaging jobs as it was six months ago, but the recovery has slowed. Temporary job losses are turning permanent, signaling just how tough it will be to get jobs back into the economy, and mass layoffs continue at companies like Disney, Exxon, and most of the major airlines. Overall, this report highlights the depths of the recession and that any hope of a V-shaped recovery led by the labor market appear overly optimistic.


U.S. Labor Force Participation Rate (Black), U.S. Total MoM Net Chg NonFarm Payrolls(Orange, in thou)

Source: Bloomberg


Market sentiment then shifted again on Monday upon Trump’s return to the White House from Walter Reed Medical Center amid renewed optimism that a fiscal deal can potentially be reached. Fed Chair Jerome Powell has repeatedly emphasized that additional policy action is required to avoid a weak recovery. Regrettably, the two sides appear to remain far apart on several key issues, specifically funding for unemployment insurance, money for state and local governments, amounts for the Child Tax Credit and Earned Income Tax Credit, restrictions on the use of money for testing, and a $44 billion gap on appropriated discretionary funding. Even if they can ultimately come to terms, Congress would have just four weeks to finalize and pass any legislation before the November 3rd election. The tensions culminated on Tuesday when President Trump tweeted that he has instructed his representatives to stop stimulus talks until after the election. Whether this was merely posturing on the part of the administration or a serious threat, stocks quickly erased their gains once the news broke. 

Treasury yields fell after President Trump’s tweet, but they still held much of their gains from the last several trading sessions as markets appear to be positioning themselves for a “blue wave” election outcome. This result would spur a sizeable infrastructure spending plan along with a surge of issuance to fund the exploding deficit. This has driven the spread between the 5 Year and 30 Year U.S. Treasury to its widest level since late 2016. This steepening may be short lived however given the remaining uncertainty still surrounding COVID and the slowing labor market. We’ll see if there’s any meaningful support at these levels as there’s a $35 billion auction of 10 Year notes later today and $23 billion of 30 Year bonds tomorrow.

                      5 Year U.S. Treasury/30 Year U.S. Treasury Yield Spread

 Source: Bloomberg

Also of note is the current shape of the VIX futures curve. The VIX or Volatility Index is a market index that represents the market’s expectation of 30-day forward looking volatility in the S&P 500. Currently market participants are positioning for increasing multi-month volatility with an increasing likelihood of downward pressure on asset prices peaking around the election. This seems to be the consensus expectation heading into year end, which absent a resurgence in COVID deaths or a material deterioration in economic data, may not materialize.

                                        CBOE Volatility Index Futures Curve

 Source: Bloomberg

While the markets grapple with the unknowns of COVID, fiscal stimulus, and the presidential election, we remain constructive on U.S. equities and continue to favor large-cap industry leaders. Should we get the volatility in November that the futures markets currently predict, we’re prepared to reallocate capital as specific opportunities arise.

                     Real Clear Politics Presidential Election Betting Averages

Source: Real Clear Politics

Ryan Babeuf, CFA

Market Strategist

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