Weakness In The Labor Market?
Past jobless claims data was weak. When there is a weak report, it looks more like there hasn’t been much improvement in a couple months. If next week’s report is strong, it will look less like that, but there is no doubt in the past couple months the rate of improvement has slowed.
As you can see from the chart below, in the past couple months recruitments and job applications have seen a decline in web searches. It’s possible job interviews are more common because in person interviews became more common with COVID-19 on the ropes. Since the end of this data series, COVID-19 cases have increased steadily.
Hope is that a stimulus and COVID-19 solutions reignite the economy. COVID-19 solutions are more important because there is a certain amount of pushing on a string with stimulus. Stimulus is more about relief than actually causing the economy to get going.
Logically, if you give someone without a job money, they will spend it, but that’s a temporary boost. If you give a small business a grant, they will spend it and then run out of money. Stimulus is about buying time so the COVID-19 solutions can revive the economy.
If there was no fiscal support, by the time the COVID-19 solutions come in 2021, there wouldn’t be an instant recovery because so many businesses will have failed. Imagine telling a former restaurant owner in 2021 they can have 100% indoor dining. They would say “that’s great, but I don’t own a restaurant anymore.”
All the benefits go to chain restaurants like Olive Garden. That’s why Darden stock is up 67.5% in the past 6 months even though their sales are getting crushed. Investors foresee a time when their competition is diminished and COVID-19 is gone. Loans to small businesses are bad for Darden.
President Trump Increases Offer To $1.8 Trillion
It makes a lot of sense for President Trump to pass a stimulus before the election because a stimulus is very popular. However, it not likely to pass because the GOP Senate isn’t interested in spending over $2 trillion. They are running against a brick wall with Nancy Pelosi who they would need to make a deal with.
And they might not think their base wants to spend so much money. President Trump probably offered a deal with $1.9 trillion in spending because the GOP couldn’t get to a 2 handle. Also, it doesn’t matter to the stock market if a stimulus passes before or right after the election. In the off chance that Donald Trump loses, he might want to pass something to cement his legacy on the economy.
Now let’s look at how those statements stack up with the latest news. On Friday, the White House increased its offer to the Dems to $1.8 trillion which is near what I said they were offering behind closed doors. This offer makes the GOP look very good because it shows they are willing to compromise.
It makes the Dems look foolish to not agree with a bill that would help a lot of people just because it’s $400 billion below their offer. They have likely lowered their offer behind closed doors. Both sides are close.
That being said, if a compromise is made at $1.9 to $2.1 trillion, individual members might not support it. Trump actually stated, “I would like to see a bigger stimulus package frankly than either the Democrats or Republicans are offering.” That’s a dramatic difference from his tweet that sent stocks lower.
Stocks likely fell because Trump has been the biggest proponent of a stimulus in the GOP. Nancy Pelosi and Mitch McConnell have been holding up the progress. If Trump was opposed to a deal, one was unlikely. Eventually, the market realized a stimulus will pass no matter what.
Tons Of Stimulus Helping Risk Assets
If you asked people in 2010 if the next stimulus (fiscal combined with monetary) was going to be as big as the last one, many would have said it wasn’t possible. Only the cynics would say the next recession would cause much more stimulus.
Some people believe the government is close to spending so much money it creates high inflation. Stimulus will boost inflation, but it could get to 3%, not the double digits. People who projected less of a stimulus in the next recession were wrong. Obviously no one could have expected a pandemic that would shut down the entire economy.
As you can see from the chart on the right, at the trough earlier this year, the composite score was much more expansionary than the trough of the last recession. It makes the global financial crisis look puny. This is good news for inflation and growth. If COVID-19 goes away next year, the long term impact of this recession on the labor market will be less than that of the last one.
Presidential Election
The market is pricing in the Democrats winning the Senate and the presidency. That makes sense because the chart below of mostly biased polls shows Biden has opened up a supposed lead on Trump in the betting odds. Most people are missing the importance of a slight margin of victory in the Senate.
If the Democrats manage to win the Senate by 1 or 2 votes, it will be tough for them to pass anything major. There are a few conservative Democratic Senators who don’t want to lose their next election by supporting very progressive plans such as a significant increase in corporate tax rates.
Conclusion
The labor market is stagnating. President Trump increased his stimulus proposal. These 2 sides are only $400 billion apart. They are likely even closer behind closed doors. There’s probably about a 50% chance a deal passes this month. Fiscal and monetary stimulus are so high that they will create inflation next year.