October 2020 Market Commentary

October 2020 Market Commentary

Financial Insights

Global equity prices ended October with mostly moderately losses. A strong start to the month, during which the Dow Jones Transportation Average posted a new all‐time high, gave way during the second half to uncertainty and selling as investors attempted to divine potential ramifications of the pending US Presidential elections and European Covid‐19 induced lockdowns were reimposed.

Polls showed Joe Biden and Congressional Democrats holding substantial national and battleground state leads in the waning days of the month, raising the possibility of a unified Democrat government pursuing higher taxes and increased regulation, especially in the energy sector.

Contrasted with a record 33+% annualized jump in 3rd quarter GDP, markets appeared more inclined to focus on potentially significant changes in fiscal policy that could slow the economy’s recovery in the event Democrats gained control of the White House and Congress.

By month’s end, most benchmark indexes had reversed early month uptrends as the election loomed and polls continued to show Democrat leads not only for the Presidency, but also in key Senate races, threatening the Republican majority. Equity benchmark performance for October and 2020 YTD are below.

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The US economy continued to rebound from the spring lockdowns in October. Numerous statistical measures of manufacturing, consumer and business sentiment, and employment activity rose. We recapped key indicators in our last blog and since that time, the September Index of Leading Indicators and of Coincident Indicators have been released. The Index of Leading Indicators posted a 0.7% increase in September and the Coincident Index a 0.2% gain.1

In the press release accompanying these data, the Conference Board observed that while still positive, the magnitude of the upticks has diminished from stronger rates of change during the summer. The assertion expressed was that the economy’s momentum may be slowing.2

In our view, moderating rates of increase are not an unexpected development. Interpreting these figures as forecasting or foreshadowing an economic slowdown seems premature. The sharp rebound from April’s trough in the equity markets and by these same indicators, plus 3rd quarter GDP gains, was bound to mitigate to more sustainable levels eventually.

We see nothing in the latest batch of numbers that suggests activity is reversing its uptrend, rather the statistical rate of expansion is returning to more normal, albeit still strong, levels. In fact, early readings from the Fed’s GDPNow tool, as of early November, suggests that 4th quarter GDP is on track for a better than 3% annualized increase compared to best case summer and fall expectations of flat growth to finish the year.3

October’s Employment Situation report reinforced the ongoing uptrend. The US economy added 638,000 jobs and the Unemployment rate dropped a full point to 6.9%.4 Year over year wage growth for the 12 months ending September was 2.9%, remaining in the range of gains (+/‐3%) needed to offset purchasing power erosion from inflation.5 October data is due late this month.

By any historical measure, the gains in employment and wages are quite strong. It seems unreasonable to characterize these or any other indictors as “slowing” simply because the rapid acceleration of the initial summer recovery is moderating.

On election eve, as polls tightened further in contended states, investors began to anticipate that perhaps tax increases and reregulation of important industries, such as energy, that were the expected result of a Democrat sweep, were not foregone conclusions.

US stocks rallied better than 7% in a stunning four day rally from November 2nd‐5th, as measured by the S&P 500, more than reversing a better than 3% decline the final week of October. The index has posted a net gain of approximately 1% since the October 23rd close through November 5th, emphasizing the uncertainty and shifting currents of pre‐election polls and the electorate’s mood.

The economy’s growth remains a critical underpinning for equity prices, but investors can be forgiven for focusing more closely at present on the unresolved US Presidential race. As of this writing, the winner of the Presidency is unknown, although Mr. Biden retains a provisional lead. Numerous lawsuits have been filed by Republicans in battleground states that so far, are too close to call.

The suits allege that voter and/or ballot fraud in Democrat strongholds is responsible for erasing Election Day leads for the President, while Democrats counter that no evidence of voting irregularities has been identified or presented. It is painful to imagine, but the country is about to endure a period much like the 30+ days in November and December 2000 that featured a succession of lawsuits and recounts culminating in a Supreme Court decision effectively deciding the outcome.6

There is another aspect to the election, perhaps even more important to equity markets and investors than the ultimate winner of the Presidency. Republicans, for the moment, seem likely to have retained control of the Senate, losing a net of one seat, and have narrowed the Democrat’s House majority. Five incumbent GOP Senators targeted as “vulnerable” appear to have been reelected despite hundreds of millions spent in their races by the opposition.7

One and possibly two Senate races in Georgia are headed for runoffs in January, but Republicans are currently favored in both contests. A diminished House majority means that Speaker Pelosi may lead a more fractious caucus in the next Congress, raising the possibility of compromise with a stronger Republican minority. A return to legislative productivity would be welcome.

Control of the White House and the ability to issue or reverse previous Executive Orders hangs in the balance of the remaining undecided state votes. For investors, however, essentially maintaining the status quo in Congress is likely to obviate fears of sharp tax increases and new Progressive‐inspired legislative initiatives, at least for the next two years. We suspect this accounts in large part for the collective “sigh of relief” that has fueled this week’s upsurge in the US markets.

1 “The Conference Board Leading Economic Index® (LEI) for the U.S. Increased in September,” www.conferenceboardorg, October 22, 2020. 2 Ibid. 3 GDPNow, www.frbatlanta.gov, November 4, 2020. 4 “Nonfarm payroll employment rises by 638,000 in October; unemployment rate declines to 6.9%,” www.bls.govNovember 6, 2020. 5 “EMPLOYMENT COST INDEX – September 2020, www.bls.gov, October 29, 2020. 6 Bush vs. Gore, December 12, 2000. 7 Susan Collins (ME), Lindsey Graham (SC), Joni Ernst (IA), Thom Tillis (NC), David Perdue (GA)

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