September 25, 2020
- Consumer spending is vital to the economy’s ‘bill of health’
- Congress still ‘flexing’ partisan agendas instead of stimulus
- The election may ‘stretch’ volatility higher in the interim
Today is National Family Health and Fitness Day! The COVID-19 outbreak undoubtedly brought our health and the health of our loved ones to the forefront of our minds, and with many states closing fitness centers in the initial stages of the lockdowns, the virus certainly challenged our traditional methods for exercise too. As the US nears 7 million COVID cases, we anticipate the virus will impact our daily actions and health habits, whether that be extra hand-washing or streamed workouts in our living rooms, for the foreseeable future. Above all, we hope that you and your families stay safe, but as your Investment Strategy Team we are rightfully assessing the current ‘bill of health’ for the economic recovery and evaluating how the upcoming presidential election may ‘stretch’ market volatility higher in the near term. Between critical economic data releases and the first debate between President Trump and challenger Joe Biden, next week could ‘pick up the intensity’ on both these fronts.
- The US Economy Hopes To Return To Its Pre-COVID-19 Shape | The US economic recovery is displaying our expected ‘K-shaped’ pattern, where various subsectors of the economy recover at dissimilar paces and magnitudes. Many critical industries such as airlines, entertainment, hospitality, and leisure have yet to begin their robust rebound, and the prolonged downturn for these sectors will impact the economic recovery in the aggregate. Until we have a successful vaccine and/or rapid testing becomes readily available (not likely until mid-2021), these industries at the lower parts of the ‘K’ will continue to struggle. For this reason, we do not anticipate US GDP returning to pre-pandemic levels until early 2022, but just as any avid gym goer knows, big changes do not happen overnight, and instead we must focus on the progress made thus far. Some of our preferred real-time activity metrics (e.g., jobless claims, Redbook sales) are finally regaining momentum after a several months long plateau and timely economic data releases such as both ISM indices, the August jobs reports, and the September reading of consumer sentiment next week could provide insights about the pace of the recovery in the months ahead. Ultimately, the strength of the economy and its recovery are heavily dependent upon a more stabilized labor market and consumers confidently spending.
- Congress Needs To Do Some Heavy Lifting To Help Consumers | With Congress ‘flexing’ its partisan agendas, the lack of a stimulus deal is concerning to our economist who believes that the economy needs stimulus now, especially with the critical holiday shopping season approaching. Our political analyst believes the next stimulus package will likely be a post-election event, raising the question of whether or not the previous stimulus actions can sustain the economy through the election. While our real-time economic indicators remain ‘healthy’, October may be more challenging as consumers and businesses receive less support. In fact, the savings rate has already been cut in half over the last three months. From an historical perspective, any economic weakness would negatively impact the equity market and hurt President Trump’s reelection chances.
- First Debate Will Take The Candidates’ Pulse On Key Issues | The first presidential debate will take place next Tuesday in Cleveland, Ohio amid heightened tensions due to President Trump’s plans to proceed with a Supreme Court nominee. Both candidates will need ‘endurance’ to last the 90 minute debate as the pandemic, economy, racial tensions, and the integrity of the election process will all be discussed. While this debate and the two that follow (October 15 & 22) may lead to interim spikes in volatility, remember that September has historically been the weakest month of the year for equities, especially if the challenger ultimately wins. However, historically, regardless of who wins, the market tends to rally into the end of the year. Interestingly, the market typically sees stronger performance into year end if the incumbent party loses, offsetting some of the pre-election sell-off.
- Health Of The Health Care Sector | Health care is underperforming this quarter (1.7% vs S&P 500’s 5.1%), as election and policy headwinds (i.e., Supreme Court vacancy and its impact on the upcoming Affordable Care Act ruling) both weigh on the sector. Despite these recent struggles, we still believe the sector is in ‘good shape,’ maintaining our overweight allocation as relative valuations (26% discount relative to the S&P 500) suggest that most, if not all, worst case policy outcomes are likely already priced in. In addition, earnings and sales growth should still show ‘signs of strength’ as both are supported by aging demographics and increased health care spending in the wake of COVID.
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