The Wait is Nearly Over


“Tomorrow and tomorrow and tomorrow, creeps in this petty pace from day to day.” – William Shakespeare, Macbeth

At least we didn’t get another sideways week last week. Instead we got the back end of the longest losing streak (nine days) in the stock market that we’ve had since 1980 – and it was one that not many noticed, since it was also about the mildest losing streak on record. Several times, stocks would open up, meander around half-heartedly for most of the session and then keel over feebly into negative territory in the last half hour.

It was less of a long losing streak than a long bout of hesitation. The reason for its length, in case you’ve been away in the Arctic, was the polling comeback by Republican candidate Donald Trump. Mr. Trump’s comeback was ignited in large part by news of chunky premium hikes in the Affordable Care Act (Obamacare), and then fanned by the curious behavior of FBI Director James Comey, whose cryptic and now-infamous letter on the Clinton email investigation went a long way to revive flagging Republican hopes.

The stock market does not want a Trump win. That’s not to say that there isn’t a substantial number of people in the investment world who do favor Mr. Trump – and the retail brokerage world has for the most part, long disliked Ms. Clinton. Some have tried to put the Street’s aversion to Mr. Trump down to its long-established dislike of uncertainty, and there is no doubting the uncertainty of Mr. Trump. What the market does know about him, though, it doesn’t like, as the corridors of power have long thought of Mr. Trump as something of an oddball. To Main Street, Mr. Trump’s wealth may seem like the stuff of myth, but on the top floors of Wall Street he is at bottom a glorified promoter and reality TV star. Not a guy to count on for President.

So as Mr. Trump narrowed his poll deficit last week, the market went into the red, though not by much, as he was still not the favorite. Should he win, however, there will be a much bigger sell-off, one likely to be in the 10%-20% range.

How enduring that sell-off would end up being is hard to say. The Brexit situation has invited many comparisons, not least by Mr. Trump itself, so it’s legitimate to ask whether a quick rebound might not ensue. Too, the defeat of Mr. Romney – a Wall Street favorite – four years ago led to a prolonged bout of selling and a funk of a couple months, give or take, duly followed by a rebound.

But the similarities are limited. The Brexit vote did indeed take markets by surprise, but a lack of immediately disastrous follow-through after a seminal event has always been a trap for equities. The stock market may flinch immediately, but it doesn’t like to truly believe in the end until it’s stamped on everyone’s face. The pound, by contrast, has been taking a prolonged beating, one that shows the real fears of the investor world. In the meantime, the crucial trigger of the UK government invoking Article 50 (the exit provision) of the EU treaty has yet to be invoked, and until it is, the U.K. is likely to muddle along in its half-world of disbelief and illusion.

The problem that any presidential winner is going to have to manage is that the business cycle has been ending, albeit on a glide path that has been remarkably shallow. The shock to the financial markets that would follow a Trump win, along with the ensuing business world uncertainty as to what to expect, could conceivably be the spark that hastens the end, though I would guess that it would take until next year to become evident. It’s hard to predict, much like Mr. Trump himself.

Should Ms. Clinton prevail, however, expect a good-sized relief rally to follow, one that might even lift markets to new highs. Though it wouldn’t be justified on profit grounds, the relief (for now) at seeing trade wars, currency wars, Federal Reserve wars etc. being taken off the table would be quite sizable, so the rally would at least be understandable. Look for opportunities in health care and bio-tech.

We should know by Wednesday, though the possibility of another Gore-Bush type stand-off cannot be excluded. Stay on the sidelines until afterwards, as there will be plenty of momentum to follow in the wake of either outcome. You don’t need to have guessed the outcome in advance or be all-in on day one to navigate these shoals.

The waiting will finally be over, as it is for the Chicago Cubs, who ended one of the longest dry streaks in the history of professional sports – 108 years, to be exact – when they won baseball’s World Series last week. It was an impressive comeback and a result that still seems otherworldly.

The Economic Beat

The report of the week was of course the October jobs report, a report that would seem to favor the chances of the Democrats. The report (a gain of 161,000, or 161K, seasonally adjusted) was not as strong as the Democrats understandably made it out to be, nor as weak as Mr. Trump’s take. The gain in private payrolls was more subdued at 142K, in line with the ADP report of two days before (and my observation last week that payrolls could well come up short of 150K) However, the shortfall was certainly not eye-catching, and was accompanied by a drop in the unemployment rate to 4.9%. The 3-month average in private payrolls eased to 154K, down from 196K a year ago.

There isn’t much that either candidate can do about it, not without going on a ruinous credit-fueled spending binge that would in the end cause more damage after the end of the cycle. Don’t look for a binge either, as any new Congress doesn’t seem likely to suddenly shift into mega-spending, mega-deficit mode.

One item in the jobs report that attracted a lot of praise was the year-on-year increase in hourly earnings, which rose to 2.8%. Accolades on the recovery followed, but there is a catch: the change in average weekly earnings is lower, at 2.5%. Another weakness in the report was the drop in the volatile household number – a loss of 43K. Individual months in household shouldn’t be taken too seriously, and the drop isn’t large by its standards, but it certainly isn’t a positive. The drop in the unemployment rate came from declines in the size of the labor force (-195K) and an increase in the not-in-labor-force category (+425K) The adjusted total for jobs in goods production was zero, with small losses in manufacturing and durable goods. Temp employment was weak at +6.4K,

A silver linings is that it was a better report than we perhaps have the right to expect, given the length of the current cycle. The result showed a jobs sector that is still hanging in there, with growth nearly gone, but the labor market the best its been in over eight years. Good, yet deceptive at the same time. Trees don’t grow to the sky – but they don’t necessarily fall over the month they stop growing, either.

The national purchasing manager surveys, known as the ISM report, showed moderately good results last week. The manufacturing survey reported an index of 51.9, about the same as the previous month’s 51.5 (50 = neutral). The new orders index eased to 52.1, down from the rebound figure of 55.1, and the growth-contraction sector score improved to ten growth versus eight in contraction, not an outstanding number by any means but breaking a two-month run of results showing higher contraction. The responder comments shown were modestly positive.

Over in the services, or non-manufacturing sector, the index slipped to 54.3 from 57.1. Apart from the fact that the results aren’t in the robust category, neither score is particularly significant on its own or signaling any real change. The services growth contraction score was a sound 13-5, prices were rising at 56.6, and the comments reflect a steady state of business. Regional manufacturing reports were in the same position, with the Chicago manufacturing index at 50.6 and oil-centric Dallas at (-1.5), still at a loss but not nearly as bad as it was last year. On the other hand, construction spending posted a loss of 0.4% in September. The monthly numbers are prone to large revisions, so it’s still possible that the year-on-year loss of 0.2% might yet recover to unchanged, but it isn’t going to be a banner number for construction. Factory orders were up 0.3%, but remain down 2.5% on a year-to-date comparison

Personal income was reported to have risen by 0.3% in September, seasonally adjusted and annualized, while spending showed a rebound from a loss of 0.1% in August to a gain of 0.5%. The more indicative year-on-year changes showed real disposable income fading to a 2.1% rate, the lowest in many months, while spending was unchanged at 2.4%. Productivity went back into the positive column in the third quarter after three quarters of decline with a good number of 3.1% (annualized). A large part of the boost was due to a drop in unit labor costs, nearly unchanged at +0.3%, echoing the fade in disposable personal income. Output enjoyed a strong boost.

International trade showed a smaller than expected deficit, thanks to falling imports and rising exports. The weakness in imports is nearly two years old at this point, reflecting the overall anemic demand conditions. Nonetheless, the report does boost third-quarter GDP. The Fed met last week and did as a good a job of being utterly unchanged in word and deed as possible; investors are still betting on a December rate bump, but it is by no means in the bag, especially if Mr. Trump should win and financial markets crumble.

Next week is all about the election, but there will also be the Labor Market Conditions Index from the Fed – little watched, and rarely positive this year. It is a remarkably quiet week otherwise, with the labor turnover report on Tuesday and the wholesale trade on Wednesday. U.S. banks will be closed on Friday, November 11, in observance of Veteran’s Day. Don’t forget to vote!

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