Earlier this morning, you likely heard or saw a headline similar to the one that got my attention at 7:00 on CNBC: “Stocks tumble as President tests positive for COVID-19.” Additionally, even though the September Bureau of Labor Statistics release at 8:30 AM that showed an increase in jobs by 661,000 and a decline in the headline unemployment rate to 7.9% seemed to provide good news, consensus expectations were for 859,000 new job according to Bloomberg. In forward looking markets, good news becomes bad news when expectations are not met.
All of this happened between midnight and the opening of the New York Stock Exchange, a time period during which the Dow Jones Industrial Average was down 2% at 1:34 AM, according to FactSet data.
As the Morgan Strategic Wealth, LLC portfolio team wrote on March 11, 2020 “Now is not the time to panic … there is no reward for taking unnecessary risks with your portfolio at this time.” Our analysis of the current situation matches with our analysis six and a half months ago. Here are the key components to our outlook:
- The Dow Jones Industrial Average jumped approximately 50 points on the news that Vice President Pence had tested negative for the Coronavirus during the pre-market. Speaker of the House Nancy Pelosi, second in the Constitutionally prescribed order of succession, was on MSNBC this morning stating that she was tested this morning “out of an abundance of caution;” she went on to say, “So again, that continuity of government is always in place.” Later this evening, we have no doubt that at least one cable news outlet or network newscast will have a Constitutional expert on outlining how Attorney General William Barr could become the President. We see this as extremely unlikely, while clearly acknowledging that political uncertainty is greatly elevated, and that market volatility will be with us for the near-term future.
- The New York Times, again, before stock market trading even began for the day, reported that President Trump was exhibiting “mild” Coronavirus symptoms, which were described as “cold like” in other reports. Should those symptoms worsen, Section 3 of 25th Amendment to the Constitution outlines an orderly process to allow Vice President Pence to become the “acting President” until the President notifies the House of Representatives and the Senate that he is able to perform his duties again. This escalation would again heighten stock market volatility, but the fact that this process has played out before under Presidents Reagan and George W. Bush should make that specific volatility relatively short lived. Presidential historians will recall that President Woodrow Wilson became ill in 1919 during the “Spanish Flu” pandemic decades prior to the existence of the 25th Amendment. The sickly President was secluded in the White House for most of the remainder of his term, and it is widely speculated that his wife “took over” the Presidency. Of course, the Republic survived that unprecedented Presidential crisis.
- Democratic Presidential candidate and former Vice President Joe Biden shared the debate stage with President Trump on Monday and has also tested negative. Treasury Secretary Steven Mnuchin, who is conducting negotiations with Speaker Pelosi on an additional “stimulus” package, has also tested negative. Wall Street and Main Street are hopeful for some additional stimulus to spur the economic recovery, so having both major players in those negotiations test negative is also positive.
- Under any pre-COVID scenario, the addition of 661,000 jobs in a single month would have been, to put it mildly, welcomed news. However, the September data shows what we have been anticipating: The rate of economic improvement continues to be positive, but at a slowing rate. Based on post-1950 data, the current slowing rate of improvement matches up with historical data. Those of you who tuned in for our Friday afternoon “Economic and Market Update” video conferences earlier this year may remember multiple reference to the Mark Twain quote “History doesn’t repeat itself, but it often rhymes.” On a macroeconomic level, we are encouraged to see new jobs added. However, a multitude of microeconomic events - the permanent closure of businesses - has raised the current estimate of jobs that have been eliminated from the economy to 3.8 million. Even if the economy continued to add jobs at the September rate, it would take approximately six months to replace those permanently lost jobs. Another theme in the Bureau of Labor Statistics report was the unexpected drop in the labor force participation rate – meaning that people have “given up” and have technically left the labor force. Statistically, this same thing occurred for several years following the Great Recession, “artificially” suppressing the unemployment rate.
Based on the news cycle that today has brought, no portfolio changes are being made. We continue to believe that there are more economic headwinds than tailwinds … until there is a widely available vaccine and/or highly effective Coronavirus treatment. Portfolios are already positioned for this outlook. In our view, home foreclosures, car repossessions, and permanent business closures (and resultant job losses) have not peaked. A Biden Presidency, which we believe the market has been in the process of pricing in, will likely have a negative impact on corporate profits through tax policy and/or regulatory policies. If Presidential polling that was available on Thursday morning is correct, then several key Senate races are critical to understand what the national legislative agenda will be for 2021 and 2022. Even though Monday’s Presidential debate made 77% of U.S. citizens less proud to be an American, according to a snap poll conducted by NBC news, the President’s positive test heightens the attention that will be focused on the Vice Presidential debate next Wednesday, October 7, 2020.
One of our primary purposes in writing this message to you is to assure you that we continue to seek out upside opportunities with muted downside outcomes. We encourage you to meet with us and discuss your portfolio, your retirement plans, and any changes to your long-term plan that living in the times of a global pandemic may have caused you to consider. We can schedule meetings through video conferencing, phone, or in our i.Park office following “New York Forward Safety Plan” requirements.
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Stock investing involves risk including loss of principal.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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