Election Day

It’s Election Day and 60M Americans are expected to head to the polls to vote. According to Bloomberg, nearly 99M early votes have already been cast in person or by mail as of yesterday evening, roughly 72.3% of the entire turnout in 2016 and accounting for nearly 40% of all Americans eligible to participate in the U.S. election.

If you give credence to the polls, President Trump is reportedly still close enough in several key swing states including Arizona, Florida, Michigan, North Carolina, Pennsylvania and Wisconsin, which would give the President a pathway to the 270 Electoral College votes needed to win the presidency for a second time. Democrats, meanwhile, are also focusing on recapturing the majority in the Senate with races in Arizona, Colorado and Georgia still extremely tight. Democrats are furthermore expected to retain control of the House of Representatives.

The virus, or more aptly stated, the policies imposed to stem the spread of the virus remain the number one risk to the economy near term. Of course, the outcome of today’s election will also have significant implications for the economy. In the near term, the biggest potential impact comes from the prospects of a Blue Wave, which would be the clearest path to a massive coronavirus aid package, after talks repeatedly broke down over the last few months. A balance of power in Congress, on the other hand, is likely to lead to further infighting and a smaller $1-2 trillion package. (Who knew one day a spending package of over $1 trillion would be considered relatively small?!)

Other implications from a Blue sweep are more likely to come in the longer run, after the U.S. economy more clearly emerges from the pandemic. Should that/when that occurs, the Biden administration has been clear in its intentions to boost taxes and regulation, a potentially worrisome scenario for investors and businesses with the prospect of a corporate tax rate hike to 28% potentially weighing on company profits. Also on a longer-term horizon, a Biden administration would likely aim to reduce tensions between the U.S. and China, while President Trump views the signing of two major trade deals – USMCA and Phase 1 of a China agreement – as welcome steps to leveling the international playing field.

Healthcare remains a key, longer-run focus as well for the two candidates: Biden has voiced support for expanding the Affordable Care Act, a move that would increase federal healthcare spending by $2T or more over 10 years, according to reports. Trump, meanwhile, has vowed to end it altogether, and replace it with something more efficient.

Ahead of the election results, equities are continuing their strong start to the week after last week’s selloff. Ending the week down 6%, equities gained an average 1.1% on Monday, and overnight U.S. equities climbed another 1.4%. Since the 2016 election, according to Bloomberg data, the U.S. stock market has gained about 53%, and more recently, rebounded from the coronavirus-induced selloff, hitting new all-time highs in September.

This morning equities are up 1.8%, currently trading at 27,411.38 as of 9:52am ET.

Yesterday, the ISM Manufacturing Index rose from 55.4 to 59.3 in October, more than the expected rise to 56.0, according to Bloomberg, and the highest reading since September 2018.

In the details, backlog of orders rose from 55.2 to 55.7, prices paid rose from 62.8 to 65.5, and employment increased from 49.6 to 53.2, the first expansion (a reading above 50) since July 2019. Also, exports gained from 54.3 to 55.7 and imports rose from 54.0 to 58.1 in October. Additionally, supplier deliveries rose from 59.0 to 60.5, production gained 2 points to 63.0 at the start of Q4, a two-month high, and new orders rose from 60.2 to 67.9, the highest reading since January 2004.

Also yesterday, construction spending rose 0.3% in September, less than the 1.0% gain expected, according to Bloomberg, and a four-month low.

This morning, factory orders rose 1.1% in September, a tenth of a percentage point more than expected, according to Bloomberg, and a two-month high.

Later today, vehicle sales are expected to increase from 16.34m to a 16.50m in October.

Tomorrow, the ISM Services Index is expected to decline from 57.8 to a reading of 57.5 in October, and ADP is expected to report that private-sector employment rose by 650k in October following a 749k rise in September. Also, the trade deficit is expected to narrow from $67.1b to $63.9b in September.

On Thursday, initial jobless claims are expected to decline from 751k to 735k in the week ending October 31.

Also on Thursday, the Fed will announce its latest rate decision. The Committee is widely expected to hold rates steady at a range of 0.00% and 0.25% and leave its current bond buying program unadjusted for now at roughly $120 billion – $80 billion in Treasuries and $40 billion in mortgage securities, net of maturing bonds, on a monthly basis.

With chaos and uncertainty stemming from the presidential election and ongoing negotiations over a potential fifth-round stimulus package, the onus falls on the Fed to provide much needed calm and implied support to the market. While the Committee is not expected to make any changes to rates or the slew of policy initiatives already in play, the Fed is likely to amp up its rhetoric reiterating its intention to remain accommodative. Furthermore, the Chairman is likely to offer assurances that while the infighting may continue in Washington, the Fed is standing ready to deploy any additional monies or credit needed to keep the market functioning smoothly, reminding market participants of the additional tools in its tool belt including additional asset purchases – after all the Federal Reserve’s balance sheet has already pushed to over $7 trillion, so what’s another trillion or two among friends? Powell is also likely to offer additional encouragement to our congressional leaders to reach an agreement sooner than later for fear of dire economic consequences should further stimulus be denied to American people and businesses still reeling from the pandemic. 

Finally on Friday, nonfarm payrolls are expected to rise 600k in October following a 661k gain in September, the unemployment rate is expected to decline from 7.9% to 7.6%, and average hourly earnings are expected to rise 0.2% in October and 4.5% over the past 12 months.

-Lindsey Piegza, Ph.D., Chief Economist