Is anyone nonpartisan? Is anyone nonpartisan?\images\insights\article\capitol-us-sunset-small.jpg October 16 2020 October 16 2020

Is anyone nonpartisan?

Dollar weakness could make for opportunities overseas.

Published October 16 2020
My Content

The Congressional Budget Office (CBO) is. A creature of Congress that’s beholden to the Republican Senate and Democratic House, its findings often are attacked from both sides of the aisle. A 2017 Chicago Booth School of Business survey of academic economists found 83% either agreed or strongly agreed that its forecasts were credible (none disagreed and 17% were uncertain). The CBO is warning federal debt, which exploded by more than $3 trillion (just getting started?) in the just-completed fiscal year, is “unsustainable.’’ The market is pricing in a Blue Wave with Democrats taking the White House and both houses of Congress. Biden is proposing fewer tariffs, higher taxes and more spending, and that’s before progressives who have remained largely on the sidelines get a crack at shaping policy. Combined with an uber-dovish Fed, we’re getting Modern Monetary Theory, or rather, policy with a capital P. Leuthold thinks this will result in surging inflation expectations, spiking bond yields and a steepening curve. It almost assuredly would be negative for the dollar and positive for international stocks. They’ve underperformed U.S. equities by 31% over the last four years, but are seeing their macro environment turn more favorable. This week, the International Monetary Fund projected economic growth overseas to outpace that of the U.S. in 2021, both in developed and emerging markets.

Stocks stumbled to start the week, just as earnings season kicked off. Coincidence? Third Seven Capital thinks not. While consensus blamed the fading likelihood of a Phase 4 stimulus deal, the investment bank thinks the market set such a high bar for the quarter that even results that easily beat estimates are being greeted with a shrug. The ratio of upward to downward guidance over the last three months increased sharply to 3.3x, a record dating back to 2000. The number of above-consensus estimates also was very strong, as were messages of confidence companies were sending: only three have suspended buybacks since July, and four that had suspended dividends reinstated them in Q3. To be sure, much about the economy looks good: 13 states have lifted all Covid-related restrictions, consumers are spending freely (more below), inventory rebuilding is getting underway and the Fed keeps adding liquidity—TIS Group expects the Fed to boost its balance sheet by another $2 trillion over the next six months. Historically, every $100 billion of balance-sheet expansion has equated with 25 S&P 500 points, suggesting the S&P could add another 500 points and approach 4,100!

Nearer term, without more stimulus, the CBO says Q4 GDP growth could slow dramatically from what is certain to be a blowout Q3 number. This would suggest U.S. stocks may be getting ahead of themselves in the run-up to the election and that U.S. earnings may struggle to keep up with overseas profits in coming months. One benefit of the September correction is it relieved excessive optimism, leaving global equities better positioned to benefit from the seasonally bullish October-December period, which has been the MSCI All Country World Index’s best 3-month span over the past 32 years. Bank of America, which narrowly expects a Democratic sweep, is recommending that investors overweight global equities on a 12-month horizon. It believes dollar weakness will worsen with this outcome, as does TIS. It expects Middle Eastern sovereign wealth funds eventually will turn into sellers of all dollar assets (they already are in the Treasury market, where foreign-related inflows have dried up over the past four years). More headwinds for the dollar and U.S. stocks. Who is going to win? Will it be a contested election? Overseas, they don’t really care. I’ll tell you who is nonpartisan—International.


  • Let’s go shopping Retail sales were much stronger-than-expected in September, doubling consensus and posting an all-time high—3.7% above January’s peak. They’re up a cumulative 33.1% from their April low. Although the fiscal cliff is having an impact on the low end, the people who remain employed (the vast majority) have seen a surge in real income growth and are spending it.
  • This bodes well for the job market September small business optimism rose for the fourth time in five months to just shy of where it was in February. More firms reported current job openings, while hiring plans matched their best level since August 2018, which implies the unemployment rate will continue to decline in the coming months. Small businesses have made it through the worst part of the recession with surprisingly limited damage—revenues have meaningfully improved, their cash position has strengthened and for the moment they do not appear to need more credit. In a related move, new business formation applications surged in Q3 as newly unemployed workers struck out on their own.
  • Manufacturing’s got it going on, waiting for services to join The Philly Fed manufacturing gauge more than doubled expectations this month, hitting it highest level since February, as increased optimism lifted hiring and capital expenditures plans. New York’s Empire State index signaled a fourth straight month of expansion as orders, shipments and employment all picked up.


  • In the end, it’s all about jobs Initial jobless claims unexpectedly rose to a 7-week high and remained more than four times their pre-pandemic level, a sign further improvements are likely to be a grind amid mounting layoffs.
  • Production hiccup While more recent data suggest factory activity is accelerating, industrial production disappointed last month, declining for the first time in four months. A cooler-than-usual September was the main reason as households cut their use of AC.
  • Disinflation remains my biggest worry At 1.7% year-over-year, increases in September core consumer prices remained well below the Fed’s target and may be on the verge of trending down as shelter prices, which account for a third of the index, decelerated and have rolled over the last two months. In fact, without last month’s 6.7% jump in used car prices, the largest since 1969, the overall price index would have been negative.

What else

Size matters when you’re working from home A big driver of the new housing boom? White-collar employees working from home who are moving into larger, more expensive houses in their cities or suburbs. Redfin reports that sales of luxury homes have surged 42% from a year ago vs. a 3% increase in mid-priced homes and a 4% decline in low-end homes.

I thought markets liked gridlock Bank of America says Biden’s polling gains could portend the most pessimistic scenario: a Democratic White House with a GOP-controlled Senate. Republican senators have pushed back against a large Phase 4 package sought by Trump and are likely to be even more fiscally conservative if Biden is president. A similarly split government froze federal fiscal policy from 2011 to 2015 despite the weaker-than-normal economic recovery. For a market hooked on stimulus, this wouldn’t be a good outcome.

Crises can be powerful motivators Gen Z, the generation that starts in 1997 and ends in 2017, is old enough to remember its first defining moment (9/11) and second defining moment (the Covid-19 pandemic). No wonder 12% of this generation already is saving.

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Tags Equity . International/Global . Politics . Markets/Economy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Consumer Price Index (CPI): A measure of inflation at the retail level.

Diversification and asset allocation do not assure a profit nor protect against loss.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards. Prices of emerging-market and frontier-market securities can be significantly more volatile than the prices of securities in developed countries, and currency risk and political risks are accentuated in emerging markets.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

The Empire State Manufacturing Index gauges the level of activity and expectations for the future among manufacturers in New York.

The Federal Reserve Bank of Philadelphia gauges the level of activity and expectations for the future among manufacturers in the Greater Philadelphia region every month.

The National Federation of Independent Business (NFIB) conducts surveys monthly to gauge how small businesses feel about the economy, their situation and their plans.

There are no guarantees that dividend-paying stocks will continue to pay dividends. In addition, dividend-paying stocks may not experience the same capital appreciation potential as non-dividend-paying stocks.

Yield Curve: Graph showing the comparative yields of securities in a particular class according to maturity. Securities on the long end of the yield curve have longer maturities.

Federated Equity Management Company of Pennsylvania