Unanswered Questions

Markets have been whipsawed by news out of Washington, D.C. with an additional round of fiscal stimulus seemingly back on the table and a huge element of uncertainty being added with President Trump testing positive for COVID-19. There was also the first Presidential debate…though it now seems like a million years ago.

Amid all of this news, the S&P 500 finished the week 1.5% higher with airlines receiving a 5.2% boost on the prospect of forthcoming aid (see figure 1). Although the two sides of Congress have yet to reach a final agreement, financial markets are expecting to see an additional round of fiscal stimulus in the range of $1.5 trillion to $2.2 trillion. Investors seem to believe that it is a matter of when, not if. In our view, sooner rather than later is likely preferred by financial markets because it reduces the likelihood of a moderation in the current economic recovery.

This chart shows an overlay of S&P 500 Airlines Index.

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Apart from stimulus hopes, the other news driving markets was President Trump contracting COVID-19. With the situation fluid, it’s unclear at this stage how this will impact the upcoming U.S. election. At the very least it will result in canceled campaign events for some time and may delay or derail the second U.S. Presidential debate that is scheduled to occur in Miami on October 15th. In terms of betting markets, the culmination of these events resulted in an uptick in Joe Biden’s odds of winning the presidency – rising from just under 59% to 64%. This trend was also reflected in election-sensitive sectors with the MSCI Global Alternative Energy Index surging 9.9% during the week (see figure 2).

This chart shows the MSCI Alternative Energy Index vs. Biden’s odd of Winning the Presidency.

We still think it’s too early to feel assured of the election outcome, but trends in either direction that reduce the odds of a delayed or contested election will likely be rewarded by financial markets. If we do see a delayed or contested election, then financial markets could trend lower as the nation awaits the decision. This happened in the 2000 presidential election with Former President Bush and Senator Gore when the S&P 500 fell about 11% between the election and the eventual concession from Senator Gore. It is possible that we see similar moves this time, but it is also possible that markets rally sharply after the election if there is certainty.

On the economic front, the U.S. economy added 661,000 jobs during the month of September, which was below expectations, but the headline is misleading because government jobs dragged down the headline with 216,000 jobs being lost. Excluding the swings in government payrolls due to temporary Census workers, the private sector added about 1 million jobs in August and 877,000 in September, which is more stable than the headlines suggest. The unemployment rate fell from 8.2% to 7.9% as the participation rate fell. A slew of other economic data also beat expectations, including consumer confidence, auto sales, and service sector gauges. While there are a lot of headlines suggesting that the economic recovery is stalling, Citi’s proprietary economic surprise index remains elevated with U.S. economic data frequently beating expectations (see figure 3). With economic momentum still solid, this should help to limit the downside to markets if geopolitical volatility persists. We expect choppiness in the near-term, but suggest staying focused on the long-term with markets likely to move higher once the uncertainty clears.

This chart shows that U.S. economic data continues to beat expectations

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