Stocks fell sharply yesterday afternoon after President Trump tweeted that he was instructing his stimulus negotiating team to halt discussions with Speaker Pelosi until after the election.
While the reaction was both instinctive and obvious, anyone who has watched Trump’s past behavior in negotiations knows that it is always darkest before the dawn. And only hours later, he was back tweeting that he would sign a string of smaller bills giving him what he wanted from the negotiations.
The last few weeks have been tough ones for the President. His performance in the first Presidential debate was criticized. That was followed by a superspreader event at the White House where it appears at least 10 people, including the President and First Lady, contracted Covid-19. With the election less than 30 days away, poll numbers seem to be going against him. There is still time to reverse course. Clearly, a package of stimulus aid that he builds and supports could be a factor in his favor. He wants to garner as much credit for anything that gets done to help the economy. He would much rather sign 3 or 4 small bills crafted to his liking than one large overall bill viewed as a compromise between Democrats and Republicans. Of course, that assumes the Democrats go along with his approach. That is highly unlikely.
Stock futures have rebounded this morning for two reasons. First, his stance of “my way or the highway” expressed in his mid-afternoon tweet was quickly reversed after hours when he said that he would sign the smaller bills. In other words, while saying earlier that negotiations were off, by nightfall he was back negotiating, albeit on his terms. Second, there will be a stimulus bill soon regardless of his negotiating tactics. The size may be dictated by the election. Yesterday, Secretary Mnuchin and Speaker Pelosi were close enough to a compromise to keep talking. However, Majority Leader McConnell expressed doubts that he could get a compromise bill through the Senate. Indeed, that opinion may have had a lot to do with the tweet Mr. Trump made yesterday afternoon. He certainly didn’t want to watch the optics of a Republican Senate turning down a compromise.
If Trump wins reelection, he will still face a Democratic House. There will be another stimulus bill, but it will be a lot closer to $1 trillion than $3 trillion. However, should Mr. Biden win, and in particular if the Senate flips to Democratic control, the next stimulus package would be significantly higher. Given that stocks look months ahead, not days, investors this morning should be less discouraged than they were yesterday afternoon. Just as we saw last week when it was announced that President Trump had the Covid-19 virus, markets are likely to recover quickly from the shock of a Presidential tweet and return to a path recognizing an ongoing economic recovery in an environment of very low inflation and interest rates.
Otherwise, we are in a bit of a vacuum for another week or two until Q3 earnings season gets underway. What we know is that without a new stimulus package, unemployment relief is less than it was over the summer. Loans to small businesses are also down. The economy is still in the process of reopening, particularly in the Northeast. That is supporting ongoing economic recovery. But, at the same time, virus counts are rising as Americans are going back inside, coincident with cooler weather, and the smaller relief checks are having some impact on retail sales. Simply said, the pace of recovery is slowing a bit.
With that said, Q3 earnings will probably beat forecasts handily. When managements last spoke to investors in mid-July, the future was fuzzy, and we were in the midst of a summer spike in many Southern states. Few managements were ready to make precise forward looking forecasts. Most attempted to talk down analyst expectations. Right now, it appears that the U.S. economy bounced back close to 30% in the third quarter, at the very high end of past expectations. That sounds like a huge number, but unemployment numbers are still 11 million higher than they were pre-pandemic. Heck, if we were all the way back, there wouldn’t be a need for more stimulus. Airlines are still operating at one-third the level pre-pandemic. Restaurants indoors are hardly crowded. Bars remain closed. Football games have crowds of only a few thousand attendees, excluding the cardboard cutouts. Virus spikes on college campuses remind us that you can’t treat Covid-19 trivially. Despite Trump’s bravado actions trying to show strength, the West Wing of the White House looks like a ghost town. It remains to be seen whether we will see more campaign rallies in close quarters without masks over the last weeks of the campaign.
Thus, given the strong Q3, we would expect a very solid earnings season. Coming just before election, it could give markets another bounce. With that said, there remain large pockets of weakness. The fate of small business is not fully reflected in the stock market. Big companies win at the expense of small. Well managed enterprises feed off the inabilities of the weak to stay afloat. Savers can’t survive on zero interest rates. Covid-19 fears will keep hotels, restaurants, venues, cruise ships and hotel rooms empty. This all won’t be over for some time. Even when a vaccine gets approved, it will take months to get fully distributed and for the impact of the virus to fade. Once it does, just as when a hurricane passes and the sun comes out again, we will be able to fully assess the damage. Some parts of the economy will rebound quickly. Others will require more time. A few won’t recover at all. But the part of our economy represented by the S&P 500 will recover and it will do so quicker than most expect. The fuel for the recovery will not be Federal funding, it will be technology. As we rebuild, we will use new tools to help reach new heights. The platforms will be the Internet, the Cloud and 5G. The tools will be software built on incredibly fast chips that will be able to do new things we can’t fully contemplate today. Our daily lives will be transformed once again. In the 1980s, we got PCs. The 1990s introduced us to video games, computer networks, and just the beginning of the Internet. The past two decades have given us search tools, social media, streaming and big data. I am excited to see what comes next in a Covid-19 free world.
Today, Simon Cowell is 61. Yo-yo Ma is 65. Vladimir Putin turns 68.
James M. Meyer, CFA 610-260-2220