An October Stimulus Surprise?

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Eustance Huang and Pippa Stevens of CNBC report stocks fall following Trump’s positive virus test, but close off the worst levels on stimulus hopes:

U.S. stocks fell in volatile trading on Friday after President Donald Trump’s coronavirus diagnosis fueled concerns about the election and a worsening pandemic.

Major averages clawed back some of the steep losses after House Speaker Nancy Pelosi signaled aid for the airline industry could be coming soon, perhaps even as part of a much-anticipated broad relief bill.

The Dow Jones Industrial Average closed 134.09 points, or 0.5%, lower at 27,682.81 after dropping 430 points at its session low. The S&P 500 slid 1.0%, or 32.36 points, to 3,248.44 after falling as much as 1.7% earlier. The Nasdaq Composite declined 2.2%, or 251.49 points, to 11,075.02.

Shares of airlines jumped higher in unison after Pelosi called on the industry to delay furloughs, saying relief for airline workers is “imminent.” American Airlines and United erased earlier losses and popped 3.3% and 2.4%, respectively.

“We will either enact Chairman DeFazio’s bipartisan stand-alone legislation or achieve this as part of a comprehensive negotiated relief bill, extending for another six months the Payroll Support Program,” Pelosi said in a statement.

Earlier Friday, Pelosi said Trump’s illness changed the dynamic of stimulus talks, adding lawmakers will find the “middle ground” and will “get the job done.” The House passed the $2.2 trillion Democratic coronavirus stimulus bill Thursday night, while Treasury Secretary Steven Mnuchin has offered a $1.6 trillion package. 

Still, the president’s diagnosis added more uncertainty to the election, an event that was already weighing on the market and keeping traders on edge as they attempted to evaluate the possible outcomes. It also raised concerns about a second wave of the virus and a slower reopening.

White House physician Dr. Sean Conley said in a memo, “The President and First Lady are both well at this time, and they plan to remain at home within the White House during their convalescence.”

Conley also said he expects Trump to “continue carrying out his duties without disruption while recovering.”

White House chief of staff Mark Meadows said Friday Trump was having “mild” symptoms after testing positive for the virus and that he and Melania are in “good spirits.”

The Trump campaign announced that all events involving the president’s participation are going virtual or being temporarily postponed.

Vice President Mike Pence and second lady Karen Pence have both tested negative for the coronavirus, Pence’s spokesman said Friday. Mnuchin has also tested negative, the Treasury’s assistant secretary for public affairs said Friday.

“This October surprise raises the already high level of political uncertainty markets are dealing with as Election Day approaches,” said Jeff Buchbinder, equity strategist at LPL Financial. “Markets appear to be increasingly pricing Joe Biden in as the favorite, and this news may not change that, but Trump could gain support from a quick recovery.”

The Trump tweet initially knocked down Dow futures more than 500 points in overnight trading.

 

“It really brings into stark reality that we are potentially going into … a second wave,” said Jeff Henriksen, co-founder and CEO of Thorpe Abbotts Capital, to CNBC’s “Squawk Box Europe.” “President Trump getting this really highlights that in a way that I think it will focus attention back on the virus and the effects it will have.”

Technology shares led the declines on Friday with Apple, Amazon, Microsoft and Facebook all losing more than 2.5%. Tech stocks could come under pressure under a Democratic sweep scenario if it leads to higher tax rates and tighter regulations, many strategists have said. Investors also could rotate out of technology shares and into more cyclical stocks if a stimulus is passed.

Also weighing on the sentiment was a worse-than-expected September jobs report. Nonfarm payroll rose by 661,000 in September, the Labor Department said Friday in the final jobs report before the November election. Economists surveyed by Dow Jones expected a jobs gain of 800,000. The unemployment rate fell to 7.9% last month.

 


The sell-off in oil prices intensified as Trump’s coronavirus news added to the industry’s demand concerns. West Texas Intermediate crude, the U.S. oil benchmark, slid 4.3% to $37.05 per barrel on Friday.

Some on Wall Street said the markets overreacted to Trump’s medical condition.

“Investors should not panic over the news,” Sean Darby, global equity strategist at Jefferies, said in a note. “It was a tail risk since other global leaders have contracted the virus, but the forthcoming US election should not be delayed in any way... 2020 has seen many 2, 3, and even 4 sigma events, and this political tail risk is by no means as big.”

Stocks have staged a historic rebound since the economic shutdown sent stocks tumbling in March. But the major averages all finished September lower, snapping a five-month win streak, as doubts emerge about the pace and breadth of the recovery.

Alright, it's Friday, time to cover markets and after a long day, there is a lot to cover.

First, let me begin with some good news on the much anticipated stimulus package.

After reading Pelosi's comments this afternoon, I'm predicting an announcement on a new stimulus package will come on Sunday morning or evening, right on time to pump markets up on Monday:

The market desperately wants more fiscal stimulus, especially after this morning's less-than-stellar US jobs report:

I have to agree with David Rosenberg, right now, stimulus hopes are keeping confidence levels high but this jobs report tells us the V-shaped stock market recovery isn't translating into a V-shaped economic recovery, and that's not good news.

I also agree with Liz Ann Sonders who is a fantastic market and economic commentator, the rise in permanent job losses and dip in the labor force participation rate while unemployment fell to 7.9% tells you there's something troubling is going on, more people falling through the cracks, especially women, and joining the ranks of permanently unemployed.

That's why Pelosi called airline executives to delay furloughs, saying more relief is "imminent".

In short, mounting permanent job losses aren't positive for any economy and without relief, there will be big trouble ahead for stocks which have ridden the fiscal and monetary wave up as far as possible.

Last week, I warned my readers to prepare for rough markets ahead, citing worries about emerging markets and fears of a European banking crisis.

This week, I'm a little more hopeful that US policymakers will finally provide the much awaited second round of fiscal stimulus and that markets can regain their footing, at least in the short run.

Earlier today, Martin Roberge of Canacord Genuity sent me his weekly market wrap-up, The Relief Rebound, where he states:

Following four negative weeks in a row, odds were skewed for stocks to rebound this week and that is exactly what we got. Resumption of the uptrend or just a bounce? Hard to say. There is not much better clarity this week on the US coronavirus stimulus bill, which seems to be a much-awaited catalyst to jolt stocks again. Also, overnight, we learned that President Trump and the First Lady tested positive for COVID-19 and were beginning their quarantine process. Some are comparing this situation to the JFK death in November 1963 and the Eisenhower heart attack in September 1955. We were not born then so it is difficult for us to discuss the analogy, but in both episodes the stock market pullbacks proved to be buying opportunities. Otherwise, economic data this week (more below) continue to suggest that a growth lull seems a high-probability scenario in Q4. As a result, risk-on commodities such as oil (~-7%) and copper (~-1%) had a rough week. Conversely, gold has risen and reclaimed the $1,900/oz level. 

As we highlighted in the October 2020 edition of the Quantitative Strategist published yesterday, we believe investors should not fear a pending growth lull. Such a softening, in our view, would not be different from what we normally observe through a post-recession recovery. With the OECD LEI diffusion index standing at 97%, a synchronized global recovery is underway. While there are question marks regarding the contribution from some service sectors given the COVID-19 second waves, global manufacturing activity should remain vibrant owing to forceful Chinese reflation/spending and the need for businesses to replenish inventories which were depleted in Q2 and Q3. The latter should boost demand for raw materials and other primary goods. Accordingly, our sector strategy is heavily tilted toward deep cyclicals and away from interest-sensitives and defensive yielders. As Chart of the Week shows, the relative performance of deep cyclicals has yet to play catch-up with the surge in the spread between ISM new orders and costumer inventories, and recent US$ depreciation.


Interestingly, apart from a synchronized global recovery which may be underway, no matter who wins the elections, there is more chatter of a major infrastructure bill, so it is possible that materials (XME) and Industrials (XLI) continue doing well:



That remains to be seen. In the meantime, I'm keeping my eye on energy (XLE) shares which continue to get hammered:


For the week, here are how the major S&P sectors performed:


As you can see, Real Estate (XLRE), Utilities (XLU) and Financials (XLF) performed the best while Energy was the only loser, declining 3%.

One real estate stock that caught my attention this week was Brookfield properties (BPY):


Recall, I recently wrote a comment on the looming real estate liquidity crunch where I wrote :"... it remains to be seen if they will continue paying that big fat dividend of 12.4% (unlikely but they are cash rich and can borrow for nothing to keep paying it out, and besides, even if they cut it in half, it's still a nice divvy!)."

I guess someone was paying attention!!

Now, it's not all green lights ahead, there are different opinions out there:

That last comment caught my attention and it ends with an ominous warning:

And, in a parallel report, BofA's Barnaby Martin rhetorically asks "why are markets lacking their usual mojo lately?" and answers:

Because it's been hard for policy makers to keep up with the sheer quantum of support unleashed earlier in the crisis. Between March and June this year, there were 109 (net) rate cuts by central banks…the last 3m have seen just 22. March '20 saw more than 1200 policy measures announced globally… but August '20 saw just 273. And while G6 central bank balance sheet growth surged $4.2tr in Q2, the growth rate is forecast to be a "meager" $1.25tr this quarter.

In short, the fact that central banks are slowing down their interventions dramatically means that the only thing that could spark a fresh burst higher in risk assets is, paradoxically, another major crisis which forces the Fed to intervene even more aggressively.

Luckily, if there is one thing the world does not have a shortage of right now, it is potential crisis powder kegs and it's only a matter of time before one or more explode.

What crisis could possibly force the Fed to intervene more aggressively? Who knows? Some emerging markets make me nervous and so do European banks but for now, all is calm as central banks slow the pace of their balance sheet expansion.

As far as stocks, here are the biggest large cap gainers this week:


I already mentioned Brookfield Properties (BPY) above, but there are others that caught my attention like Paycom (PAYC),  Quidel (QDEL) and Twilio (TWLO).

What else? This tweet by Bespoke on Bed, Bath & Beyond (BBBY) also caught my attention:

On the macro front, James Perry, SVP & Partner at Arbor Research, posted this on LinkedIn earlier today:

If you can't read it, here is what he posted: 

We really should be golfing by now.  But before we go… 

  • The Dollar (DXY) is down -2.74% this year. 
  • The S&P 500 (SPX) is up +4% this year. 
  • The Treasury 10y Note Future (TY1) is up +8.74% this year. 
  • Gold (GC1) is up +25% this year. 
  • Oil (CL1) is down -39.5% 
  • Nasdaq 100 (QQQ) is up +30.4% this year. 

--------------------- 

This is the logical outcome one would expect to a world in which: 

  • The economy faces an unexpected, massive, and extremely-negative demand-shock. 
  • A shock to which, the government response is an enormous monetary & fiscal stimulus package. 
  • Stimulus which predominantly remains in the financial system. 
  • And all costs of doing all business must be slashed - just to remain operational. 

So? Yes.

  • A substantially slower economy, which is deflating…
  • An extremely liquid, & leveraged, financial system, and… 
  • An acceleration of service-sector, digital-transformation. Adjust portfolio accordingly.

I think he's right but I'm actually bullish on the greenback going forward because in relative terms, I think the US is in better shape than Europe and even Asia.

As far as an extremely liquid and leveraged financial system, there was some improvement in sentiment from US leveraged loans portfolio managers which is worth noting:

Lastly, have to agree with George Stephanopoulos, this was THE worst presidential debate ever! Neither candidate impressed me, they didn’t lay out their respective plans and didn’t discuss important topics in-depth. It was an unmitigated disaster and quite frankly, a huge waste of time watching it:

Let's hope we never, ever see anything like this debate ever again the future, it was shameful on both sides.

By the way, those of you who think it's a cake walk for Biden to win, don't be so sure, I think there is a huge percentage of American voters who will quietly cast their ballot for Trump again. 

But that's a November surprise and we're not there yet.

And since it's Friday, don't know if this is real but watching this twit made me laugh earlier:

Below, nonfarm payrolls were expected to increase by 800,000 in September, according to economists surveyed by Dow Jones. The unemployment rate was expected to fall to 8.2%. Kate Moore of BlackRock, Jason Furman of Harvard's Kennedy School, Michael Strain of the American Enterprise Institute and Lisa Cook of Michigan State join CNBC's "Squawk Box" team to discuss.

Second, CNBC's Ylan Mui reports the House is currently working on a relief bill to help the airline industry. Speaker House Nancy Pelosi issued a statement asking major airlines to hold off on furloughs.

Congressman Steny Hoyer said the House will not leave for break as the House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin work together to pass a second stimulus bill. CNBC's Ylan Mui joins 'Fast Money Halftime Report' to discuss.

Degas Wright from Decatur Capital also joins 'Fast Money Halftime Report' to talk about the need for a second stimulus bill and the impact it would have on markets and the economy.

Fifth, earlier this week, CNBC's Steve Liesman talked with Dallas Fed president Robert Kaplan about monetary policy amid the recession, due to the coronavirus pandemic, and what needs to happen to stabilize an economic recovery. Kaplan worries rates at zero will push investors out on risk curve.

Sixth, CNBC's Leslie Picker breaks down the highlights from the Delivering Alpha conference, including political and economic insight from Barry Sternlicht of Starwood Capital and Chamath Palihapitiya of Social Capital.

Lastly, I posted my favorite CNBC interview of the week, one with Jonathan Webb, founder and CEO of AppHarvest, and Martha Stewart, founder of Martha Stewart Living Omnimedia. Love the energy of that agricultural CEO!!

Update: On Saturday, President Trump put pressure on Congress to pass a coronavirus stimulus deal, telling lawmakers to “WORK TOGETHER AND GET IT DONE.”

As I stated above, I expect an announcement on Sunday, right on time to juice markets higher come Monday. Who knows? Stay tuned...

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