More Positive Economic Signs Emerge, Despite Uncertainty

The election is next week, and stimulus politics continue to churn, but we’re keeping things simple: The political froth is nothing but near-term volatility. Thursday’s debate didn’t do much to sway stocks on Friday. We’re also going to get another round of stimulus sooner or later — regardless of who wins on Nov. 3. In other words, when it comes to investments, it’s better to focus less on the week ahead and more on the months and years ahead.

Again, over the long term, the president is neither an absolute positive or negative for economic growth and markets — we recently published a macro perspective on that very topic. To zoom in a little more, Northwestern Mutual equity portfolio managers Matt Stucky and Jeff Nelson discussed election implications for specific sectors of the economy. In a nutshell: They focus on quality names with durable advantages and keep a long-term investment mindset. An election isn’t going to fundamentally change that philosophy.

No doubt, we may see knee-jerk market reactions in the days, and perhaps weeks, after polls close. But it's a good idea to shift your focus to some key points that are likely to support markets: Big news about vaccines and treatments is forthcoming; economic momentum is still building; and while cases are rising, Americans and the economy are adapting amid the pandemic. These catalysts should serve as ballast for markets for the rest of the year and into 2021. And, frankly, a lot of positives emerged last week. Let’s dive into a few.

WALL STREET WRAP

FDA Approves Gilead’s Coronavirus Treatment: As mentioned in previous commentaries, we the expected fall/winter season would be packed with developments about coronavirus treatments and vaccines. On Thursday, we got a big update from the FDA: The agency officially approved Gilead’s remdesivir for use treating hospitalized COVID-19 patients who are 12 years and older, marking the first and only COVID-19 treatment to receive full FDA approval thus far. It’s a drug NIAD Director Dr. Anthony Fauci said would be “the standard of care” for coronavirus patients, and was also given to President Donald Trump during his recent bout with COVID-19.

A tried and tested treatment, although not a cure or vaccine, is a big step in achieving the fourth waypoint to an economic recovery that we outlined early on in the pandemic.

Jobless Claims Fall Below 800,000: Weekly initial jobless claims fell by 55,000 to a seasonally adjusted 787,000 for the week ended Oct. 17, the U.S. Labor Department said Thursday. Claims for the week ended Oct. 3 were also revised down to 767,000 (and to 842,000 from 898,000 for the week ended Oct. 10). The revised totals marked some of the lowest initial claims totals since March and may be a sign the economic recovery isn’t losing steam even as new cases touched a record last week and lawmakers have yet to pass another aid package. Of course, the prospect that local economies reimpose some restrictions remains a key uncertainty in the weeks ahead. 

Businesses Expand in October: The IHS Markit PMI indexes for both services and manufacturing rose in October. Services, which includes health care, technology and hospitality, rose to 56 in October from 54.6 in September — the highest level in 20 months (a reading above 50 indicates expansion). The smaller manufacturing sector rose to 53.3 from 53.2, a 21-month high. All signs point to a recovery that isn’t showing signs of backpedaling.

U.S. Home Sales Reaching Higher: The housing market continued its hot streak as existing home sales rose to a 14-year high in September. By the numbers, sales rose 9.4 percent over August’s mark, and 20.9 percent from the year prior. A confluence of factors is coming together this year to drive the market higher: low mortgage rates, high demand, a tight supply of homes for sale, a wave of millennials reaching their prime home-buying years and a surge in buyers looking for more space. Properties remained on the market for just 21 days, which is an all-time low, according to the National Association of Realtors.

The pandemic has solidified the work-from-home trend, with some companies making it a permanent policy. It’s allowed workers to move further from corporate offices, and juiced demand for larger homes that can accommodate a home office and more space for the kids.

Some More Color on the Economy: The Federal Reserve’s Beige Book offered a few more insights to back up the high-level economic data we’ve been tracking. Generally, the outlook remains optimistic or positive through the Fed’s 12 districts, but with a considerable degree of uncertainty. One challenge on the horizon: Restaurant owners, particularly in northern climes, are concerned that cooler weather will hit sales, given they’ve relied on outdoor dining to make up for indoor capacity constraints.

Fed contacts in the banking industry say mortgages have been a primary driver of loan sales but expressed concern that delinquency rates may rise in coming months. So far, delinquency rates have remained stable. In fact, consumer finance companies, such as Discover and Capital One, said in recent earnings calls that charge-offs fell and provisions for loan losses were a fraction of what they were a few quarters ago.

THE WEEK AHEAD

GDP in Focus: This week we get the first read of GDP and professional forecasters are penciling in an annualized, quarter-over-quarter rise of 31 percent. Meanwhile, the Atlanta Fed’s GDPNow tracker (a real-time GDP estimate) is showing a 35 percent increase. Either one of these would leave GDP just 3 to 4 percent below December’s levels after falling into an absolute abyss in Q1/Q2 — a decline of 10.1 percent from year end 2019. There’s still a gap to close, but it is much smaller than almost anyone forecasted back in spring. GDP is recovering quickly, and the market is pricing in a 2021 return to new highs. GDP could provide a lift for markets later this week.

Big Tech, Big Pharma in the Limelight: This week the biggest technology companies that have thrived in a COVD-19 “new normal” will announce earnings through the week. We’ll hear from Microsoft, Alphabet, Amazon, Apple and Facebook which, have a combined market value of $7 trillion. For context, the GDP of the entire U.S. economy was $21.7 trillion in 2019. It goes without saying that positive or negative surprises in these names will move stocks more broadly during the week.

Pharma names, squarely in the spotlight amid the pandemic, also report this week. Pfizer, Eli Lilly, Merck and Gilead are all on the docket. Expect to hear some vaccine discussions during these earnings calls.

How’s the Consumer Feeling? Lastly, amid a flurry of earnings, we’ll get a check on consumer confidence for October. It’s a measure that’s solidified lately, and we’ll see if the recent uptick in cases, the lack of stimulus and the election has impacted consumers’ outlook.

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