Stimulus Controls The Market
Speculation over the stimulus is controlling the market. For a brief moment, the futures market reacted to the presidential debate on Tuesday night, but then the algorithms switched over to following the stimulus negotiations. It’s fairly uncertain if anything will get done.
But some lean towards thinking something will happen because of how quickly the parties agreed to a budget deal which funds the government through December 11th. Hopefully, the 10% correction was enough to scare the GOP into acting. They probably realize that if nothing passes, we could see an even greater decline heading into election day.
House Democrats called for a $2.2 trillion stimulus. Treasury secretary Mnuchin gave the Dems a counter offer on Wednesday night. His plan calls for $1.62 trillion in spending. It means he went above the previous White House limit of $1.5 trillion. That limit was completely arbitrary. Just the fact that he went above it, shows he’s willing to negotiate.
A deal is not a lock though because there is still a $538 million difference between both sides. Now that everything is public, negotiations will likely go behind closed doors. They will either agree to a $1.7 to $1.8 trillion deal or nothing will get done. Some are leaning towards a deal, but it’s a fluid situation. Check to see how small cap value stocks are doing to determine if the market sees a deal getting done.
Specifically, both sides want to give $1,200 checks to people and $500 to dependents. GOP wants to do $400 in weekly unemployment benefits. The more the two sides dither on this topic, the less it is needed as the unemployment rate continues to fall. It’s now or never for this deal as people are hurting, but may get back to work within a few months.
GOP plan calls for $250 billion in state and local aid as well as $150 billion for education. Finally, it calls for $75 billion for testing and tracing, $60 billion for rent and mortgage assistance, and $15 billion for food assistance. Hopefully, that money mostly goes to renters because they are in much worse shape than homeowners.
Very Strong ADP Report
September ADP report was very strong which is good news for the BLS report because the ADP reading has been underestimating job creation since the recession started. It has been missing by less each time which is why we wanted to see a good ADP report.
For instance, if it missed estimates, we wouldn’t have been so sure the BLS report was going to be great. Luckily, we don’t need to worry about that as the report beat estimates coming in at 749,000 jobs created. Consensus was 650,000.
August reading was revised up from 428,000 to 481,000, but that doesn’t matter much because we already know the BLS report was much better. As you can see from the chart below, ADP payrolls are now 8.1% off the high set in the previous expansion. We’re closing in on the trough in the last recession which was -7.4%. However, BLS job growth gets the final say and it has been stronger.
An updated consensus is 894,000 jobs created. With this ADP report out, we can now expect there to be between 800,000 and 850,000 jobs created. Consensus is also for 900,000 private sector jobs created as the government is expected to lose jobs because the census is over. That would be very close to August’s reading because there were over 300,000 government sector jobs created last month.
Getting into the details of the ADP report, there were 192,000 small business jobs added, 259,000 midsized jobs added, and 297,000 jobs created by large firms. There were 196,000 goods producing jobs added and 552,000 service sector jobs added.
Manufacturing and construction are on fire as they added 130,000 and 60,000 jobs. That shows how strong the manufacturing sector has been. The BLS consensus calls for just 33,000 manufacturing jobs added.
On the services side, leisure and hospitality added 92,000 jobs which many find surprising given how weak the hotel and airline industries are. Who is creating all these jobs? Finally, trade, transportation, and utilities created 186,000 jobs likely because of all the online shopping that has been occurring in the past few months.
Big Improvement In The Chicago Business Barometer
September Chicago business barometer was 62.4 which rose from 51.2 and destroyed estimates for 52.1. It beat the high end of the estimate range which was 56.3. As you can see from the chart below, the index is almost at the previous cycle peaks. It is the highest reading since Q1 2019.
This supports my thesis that the manufacturing sector will be strong in Q4 and could even peak by the middle of next year. It’s crazy to think of a peak so early in the cycle, but the sector peaked in 2011 as the chart shows. That was just 2 years into the expansion.
All 5 of the main indicators in this report saw gains, with production and new orders leading the way. Production index was up 16 points to a nearly 2 year high and output was up 29.2 points on a quarterly basis. New orders index was the highest since November 2018 as it rose 32 points in Q3. Prices paid index was up 9.7 points just like the Philly Fed index. Inflation might be coming faster than the market and the Fed think.
Conclusion
Stimulus controls the market in the near term. It’s interesting how important the stimulus is to the market given the very strong ADP report and the strong manufacturing reports. There are still millions of people left behind though as the new economy isn’t taking some of the old industries with it. If you worked in a hotel or for an airline before the crisis, you’re in trouble. COVID-19 virus needs to be dealt with before we can cease stimulative measures.