Forks in the Road: Fiscal Stimulus, Economic Recovery and the Election

Oct 23, 2020 / By Charles Sherry, MSc
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We know the variables that affect stocks, but estimating how those variables might translate into weekly, monthly or annual stock market performance is guesswork at best. Yes, even the best and brightest have trouble calling market tops, bottoms or annual market performance.

Certainty is never a part of the equation for investors. It’s one of many reasons why we encourage clients to keep a long-term perspective and adhere to an evidenced-based financial plan.

In today’s environment, uncertainty reigns. Short-term investors are trading on fiscal stimulus headlines, but they are also keeping a wary eye on the upcoming election.

By nearly all measures, Biden seems set to become the next resident of 1600 Pennsylvania Avenue, but polls in the key battleground states suggest the race may be tightening.

Will we know the results on the evening of November 3? How long might it take to count the ballots? Could we have a disputed election? How the race plays out may have a significant impact on markets in the shorter term.

Meanwhile, economic growth exploded in Q3, but it is set to moderate in the current quarter. In today’s environment, economic forecasts are subject to significant upgrades or downgrades. Most analysts, however, suggest the risk is to the downside.

Bottom line, we’re facing an enormous amount of short-term uncertainty, and investors are struggling to discount the near-term; hence, we’re experiencing more pronounced market swings, which could continue past the election.

1. Labor market gains

  • April registered a record loss of 20.8 million jobs, per nonfarm payroll data.
    • April followed a loss of 1.4 million jobs in March.
  • In the months of May-September, the economy added a net 11.4 million jobs.
    • 51% of the net loss in jobs have been recovered.
    • Progress has been considerable, but the economy has a long way to go before topping its prior high of 152.5 million nonfarm payrolls.
Figure 1: Significant Recovery, but More Ground to Make Up

Source: U.S. BLS, NBER, Sept 2020. Shaded areas mark recession.

  • Job growth has been robust by historical standards—up 661,000 in September, but it has been slowing down.
Figure 2: The Low-Hanging Fruit Has Been Picked

Source: U.S. BLS, Sept 2020

  • No group, using education attainment as our metric, has avoided the ravages of the Covid recession.
  • Those with the fewest skills and least educated have suffered the most, as service-oriented businesses closed.
  • The jobless rate is far from a perfect measuring tool. Those who are discouraged or have left the labor market (aren’t looking for work) aren’t counted as officially unemployed.
  • While the jobless rate remains high for those without a high school diploma, reopenings have brought furloughed workers back into the workplace.
    • Yet, businesses aren’t fully reopened, and many have yet to be recalled.
    • Others are finding out that temporary furloughs are turning into a permanent job loss.
Table 1: The Poorest Bear the Brunt Jobless rate by education
Educational level Sept
Less than high school diploma 4.8% 21.2 19.9 16.6 15.4 12.6 10.6
High school diploma 3.6% 17.3 15.3 12.1 10.8 9.8 9.0
Some college 2.9 % 15.0 13.3 10.9 10.0 8.0 8.1
Bachelor’s degree or higher 2.0% 8.4 7.4 6.9 6.7 5.3 4.8
Unemployment rate 3.5% 14.7 13.3 11.1 10.2 8.4 7.9

Source: U.S. BLS Table A-4, St. Louis Federal Reserve

  • Today’s concern—service-oriented businesses are being hobbled by social distancing restrictions, and daily Covid cases are accelerating again.
  • The Fed is practically begging Congress to pass another robust stimulus bill. As Fed Chief Powell put it, “The risks of overdoing it (fiscal stimulus) seem, for now, to be smaller.” Is more stimulus needed? Fed officials and most economists believe it’s warranted. Not all economists are on the same page.
  • Stocks continued their strong run through August, despite the lack of agreement on jobless benefits.
    • Recently, volatility has resurfaced as investors trade on stimulus headlines, suggesting that investors believe government cash is a needed bridge to a vaccine.

2. A double-dip recession?

  • Probably not, if you follow the Conference Board’s Leading Economic Index.
    • Up 0.7% in September
    • Up 1.4% in August
    • Up 2.0% in July
    • Up 3.1% in June
    • Up 3.1% in May
    • Down 6.3% in April
  • Since May, the numbers have been strong, but the rate of increases has been slowing, suggesting that the recovery will moderate—but not stall.
    • After what’s expected to be a record Q3, we’d expect some moderation. But too much of a slowdown could create more permanent problems and leave those who are unemployed on the sidelines.
  • Another excellent leading economic indicator is weekly initial jobless claims.
    • It’s not only a labor market gauge, it measures business confidence as falling layoffs signal businesses are more reluctant to lose workers as activity firms.
    • Rising layoffs signal the opposite.
  • In two of the last three weeks, initial claims dropped below 800,000.
Figure 3: Slow Progress

Source: St. Louis Federal Reserve 10/17/2020
Note: As of Aug 29, the Dept of Labor revised its methodology for seasonally adjusting weekly claims to more accurately reflect the pandemic’s impact on the data. Prior data were left unchanged.

  • As lockdowns ended, claims drop sharply, but progress has slowed.
  • The still-high level of initial claims points to a high level of layoffs and a high level of uncertainty in the economy, even as companies hire (or bring back) millions of workers each month.
  • The gradual improvement is painfully slow, but it suggests economic growth hasn’t stalled.
  • For comparison purposes, in the Great Recession, claims peaked at 665,000 March 2009 before gradually receding.
Figure 4: Then vs. Now

Source: St. Louis Federal Reserve

3. The red-hot housing market—a checkmark recovery

  • After a brief lockdown-inspired lull, the housing market has roared back.
    • New home sales are at a 14-year high.
    • Existing home sales are at a 14-year high.
    • Single-family housing starts and single-family building permits are at a 13-year high.
    • The NAHB Housing Market Index (home builder sentiment) hit an all-time high (records back to 1985).
    • The U.S. MBA Purchase Index (weekly mortgage applications for home purchases) has slipped over the last four weeks but remains in an elevated range.
  • The NAHB said, “New single-family home sales are outpacing starts by a historic margin. Bridging this gap will require either a gain in construction volume or reductions in available inventory, which is already at a historic low in terms of month’s supply.”
  • Record low mortgage rates and an interest in suburban and more rural areas is aiding the sales of new homes, per the NAHB.
  • A tight supply of existing homes may also be encouraging buyers to look at new homes.
  • But there are risks to the medium and longer term.
    • Might there be too much complacency regarding mortgage rates, which play off the 10-year Treasury?
    • Prices are rising, which could dampen demand and create affordability issues.
    • Supply chain issues, lot shortages, and rising lumber costs are also impediments. For now, this is a high-class problem for builders.

A peek ahead

I. Earnings

  • Q3—another bad season but it looks as if Q2’s 30.6% year-over-year decline will be the bottom.
    • After S&P 500 EPS fell from $33.13 to $27.98 in Q2, Q3 earnings are projected to rise to $34.30 (Refinitiv as of Oct. 22).
    • If history is a good guide, the forecast is likely to rise as companies top a low hurdle.
  • Q2 S&P 500 profits are forecast to decline 17.2% versus a year ago (Refinitiv).
    • That compares with -21.4% projected on October 1 and -25.0% projected on July 1.
  • With 25% of firms having reported through October 22, a strong 84% are beating conservative forecasts by analysts, and they are beating by a wide margin.
    • The strong economic recovery and weaker dollar are aiding earnings.

II. Record Q3 GDP

  • After plunging at an annual rate of 31.4% in Q2, Q3 GDP, which will be released on Thursday, October 29, is expected to expand at a record pace.
    • The prior quarterly record of 16.7% was set in Q1 1950 (quarterly records date back to 1947).
  • The Atlanta Fed’s GDPNow model paces growth at 35.3%, while the Blue Chip Consensus forecast has risen over 10 percentage points since the quarter began.
Figure 5: An Explosive Quarter

Source: Federal Reserve Bank of Atlanta; latest estimate: 10/20/2020

  • GDP is backward-looking: July–September.
  • We’re about to enter November, and investors are forward-looking.
  • The recovery has been uneven, but Q3’s bounce has been more than almost anyone had anticipated.

Election 2020—my thoughts

Nearly all are disgusted by the incendiary atmosphere today. Social media gives everyone a platform, but it also adds to the vitriol.

Our Declaration of Independence reads in part, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. …That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed…”

Yes, that’s right, the “consent of the governed.”

“We the People of the United States, in Order to form a more perfect Union…” are the 15 opening words to the U.S. Constitution. They are equally as powerful.

The Declaration of Independence and U.S. Constitution were written by flawed but gifted individuals. They expressed lofty ideals.

However, if we dig into our past, it won’t take long to find that the sins of slavery and discrimination are a stain on the lofty ideals set in place by the Founding Fathers.

Yet their foresight gave birth to a republic that is ruled by the consent of the governed. Collectively, that is us. That is you. That is me.

Those who side with the 2020 winner will be jubilant. Those who feel the sting of defeat will be sorely disappointed.

But please, let us never forget the rights and freedoms that have been handed down to us from prior generations.

As we continue to progress toward a more perfect union, let us be sure that we preserve and expand those freedoms for our children and grandchildren.

Charles Sherry, MSc, is a financial writer who is passionate about delving deep into the markets and leveraging communication to improve the client experience. He has almost 25 years of industry experience, including six years authoring the highly-rated Schwab Market Update. Charles is a writer and speaker who works primarily with financial advisors, providing timely content for newsletters, blogs and social media. The goal: bolster client engagement and increase advisor visibility. Learn more at or contact him at


Great perspective Charles. Thanks. I'm concerned about all the money we are "Printing." The Fed balance sheet is heading toward $10 trillion, stratospheric on any basis . Can we really believe that this will end well? Why does the stock market go up on news of more relief? I understand the humanitarian need, but printing more money is not good news. Thanks

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