I thought you said it was going to be sunny?
Summary: The rollercoaster ride that is the U.S. economy is likely to continue through into the first half of 2021. The U.S. economy plummeted in the first half of the year but is expected to rebound in Q3 and will limp out of the year with a real GDP contraction of around 5%. Unemployment will probably be between 8%-9%. The good news is that we have likely seen the worst of the downturn behind us. The bad news is that we could be heading into another bumpy patch, with an increasing chance of another recession (dependent on what happens on the COVID-19 front, fiscal U.S. policy and quite possibly a new set of policymakers in the White House). There is much more room for downside surprises than upside surprises, especially as investors have not fully factored in the impact of what are likely to be some of the economic policies of a potential Biden/Harris administration. This is not to argue that if Joe Biden wins the presidency we will be wearing Mao jackets and quoting from his Little Red Book, but that a change of administration will usher in new policies, different priorities and come with its own rhetoric (some of which will be taken as anti-business). Tech in particular is set to have a bumpy ride, which means that its favored space for investors will probably be diminished. And a really big question for a potential Biden administration is how to keep a recovery’s momentum by raising taxes on the first day of his administration? For investors, it is time to give thought about rotation into other sectors, more green and infrastructure-related.
The narrative through the rest of October is going to be defined by the following:
· Do we have another presidential candidate debate? Hard to say. If we do, let’s hope that they are not a repeat of the September 30 “shit show”.
· Any comments out of the Federal Reserve, in particular, Chairman Jerome Powell on the need for fiscal stimulus to make certain the economic recovery doesn’t stall.
· Markets will also be sensitive to polls if it appears that one of the candidates is significantly pulling ahead. We also question how accurate the polls are,thinking it is possible that Trump supporters are probably stronger than the data currently shows (which is what happened in 2016). For what it is worth,the national average in opinion polls gives Biden 51.6% of the potential vote to Trump’s 41.9%. (RealClear Politics) That said, we still think the election is Biden’s to lose.
· The other major item which could impact markets is the potential for the passage of a new fiscal stimulus package. In early October it was hinted that the two sides were close and then it was killed by a Tweet from the President blaming the Democrats. We remain doubtful of a new fiscal package this year.
· We expect more anti-China talk from both the Trump administration and the Biden campaign. It was no mistake that Secretary of State Pompeo went to Tokyo for the Quad meeting with his counterparts from Australia, Japan, and India. This is the face of realignment of Asia’s geopolitical fault lines.
· We would not rule out an October surprise, but not from the Trump or Biden campaigns, but from North Korea, which has been relatively quiet lately. October is usually the big month in North Korea for military parades; this year the Workers’ Party celebrates 75 years. Time for a new weapons test.
Economic data remains important. This past week the ISM Services Index came in above expectations at 57.8. Consumer demand, employment and housing all will be watched closely to determine just how strong the economic recovery is. Strong data could strengthen the hand of Republican Senators who are dragging their feet on a new fiscal stimulus program.