After an election week that saw stocks rise, major vaccine news this morning is causing big optimism in the markets.
Pfizer and Germany-based BioNTech early on Monday announced that their coronavirus vaccine, based on preliminary phase-III data, was more than 90 percent effective preventing COVID-19 in people who had no prior signs of an infection. White House coronavirus advisor scientists were aiming for a 75 percent effective rate, but Dr. Anthony Fauci has said a vaccine that’s even 50 to 60 percent would be acceptable. Clearly, Pfizer’s candidate is exceeding expectations, based on late-stage data. That news powered markets toward a record open, particularly virus-sensitive industries, such as airlines. Given what we know thus far, this is a major milestone for markets and the economy, and we may be seeing glimmers of light at the end of the tunnel for the pandemic.
Election day is also behind us, and on Saturday news outlets declared Joe Biden the winner and the 46th president of the United States, although President Donald Trump has vowed to challenge the results in several states. Politically speaking, it was a tumultuous week as results came in. And with legal challenges forthcoming, it may be a few weeks before the election is officially behind us.
WALL STREET WRAP
Why Markets Brushed Off the Election: Markets were generally unfazed by the election. As I pointed out in a post-election discussion with Northwestern Mutual Chief Investment Officer Ron Joelson, investors appear bullish about the prospects of a divided government. Joe Biden will occupy the White House, but markets appear to have priced in a Republican-led Senate. Essentially, that check on the Executive Branch could mean a more status quo policy situation in Washington. That reduces policy uncertainty here in the U.S. and is bullish for markets. Keep in mind, two Senate races in Georgia are headed to a Jan. 5 run-off that could tip the scales in the Senate (a recount in that state is also expected). Also keep in mind, the Democrats lost seats in House, which narrowed their majority and may impact policies that are proposed or passed.
Powell Calls for More Aid: The Federal Reserve met this week and, as expected, held its benchmark rate to a range between 0 percent and 0.25 percent. That’s where it’s been since an emergency cut seven months ago in the early stages of the pandemic. While the economic activity and unemployment is recovering, Fed Chair Jerome Powell said both remain well below their pre-pandemic levels. However, Powell said the Fed hasn’t exhausted all its ammunition to help the economy push forward but again emphasized that it can’t succeed alone.
“Fiscal policy can do what we can’t, which is to replace lost incomes for people who are out of work through no fault of their own,” Powell said. He said additional government spending, or stimulus, measures are “absolutely essential.”
With the election largely in the rear view, we expect lawmakers will look ahead and focus on crafting an aid package. To that end, House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell on Friday both renewed calls for stimulus. However, it’s still not clear when a final deal will be reached.
Manufacturing Accelerates, Services Slow: U.S. manufacturing activity shifted into a higher gear in October, with new orders jumping to their highest level in nearly 17 years. The Institute for Supply Management said its manufacturing index hit 59.3, up from 55.4 in September (anything above 50 indicates the sector is expanding). October’s reading was the highest since September 2018 and handily beat expectations. Survey respondents say they are adjusting to reconfigured factories, driven by COVID-19 precautions, and are getting more productive with each month. New orders, fueled by low customer inventory levels, were robust as backlogs increased. The ISM’s new orders sub-index climbed to 67.9, its highest level since January 2004.
It was a slightly different story for the larger services sector of the U.S. economy. While activity in the sector expanded for the fifth straight month in October, it was a tad slower. The ISM’s services index dipped to 56.6 in October (still a strong read) from 57.8 in September. COVID-19 remains the biggest driver of sentiment and activity for the sector, because these businesses rely on people getting together or traveling. Businesses say they are adjusting to “normal” during the pandemic and are seeing activity pick up, but they worry the coronavirus could cause an unexpected setback.
Unemployment Rate Keeps Falling: U.S. nonfarm employers added 638,000 jobs last month — private payrolls were up 906,000, but government payrolls dropped by 268,000, with more than half of those representing census workers. Overall, the unemployment rate dipped to 6.9 percent from 7.9 percent a month ago. The BLS survey of roughly 60,000 households brings in demographics, gender and ages to employment data. It’s a bit broader because it includes self-employed people and agriculture workers. That survey indicated 2.2 million people became re-employed last month — many of these people are just coming back after being temporarily out of work.
By the latest tally, the job market has now recovered 12.1 million of the 22 million jobs lost in March and April at the height of coronavirus shutdowns. There’s still a lot of ground to make up before we return to a pre-pandemic labor market, but by all appearances the economy is on the mend.
THE WEEK AHEAD
Small Business Check In: This week we’ll get the NFIB’s small business survey results for October. The report will be coming on the heels of two straight months of gains, including September’s jump, which was one of the largest on record. Given the unemployment figures and data from ISM, this could shape up to be another positive report from Main Street.
Taking the Temperature on Inflation: Given the Federal Reserve is now targeting an average inflation rate of 2 percent (meaning the Fed will let it run higher than that for some time), it’s worth checking in on this metric routinely going forward. This week’s CPI and producer prices for October should give us some insight into U.S. inflation. The Fed would like to see inflation push a little higher to aid the economy and employment.
Consumer Sentiment: How are consumers feeling? Election Day is in the rear view, there’s an improving job market, and stimulus talks are restarting. At the same time, coronavirus cases are rising. There’s a complicated mix of positives and uncertainties for consumers to ponder. Later this week, we’ll see how they’re feeling in November heading into the crucial holiday spending season.
Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.
There are a number of risks with investing in the market; if you want to learn more about them and other investment-related terminology and disclosures, click here.
As the chief investment officer at Northwestern Mutual Wealth Management Company, I guide the investment philosophy for individual retail investors. In my more than 25 years of investment experience, I have navigated investors through booms and busts, from the tech bubble of the late 1990s to the financial crisis of 2008-2009. An innate sense of investigative curiosity coupled with a healthy dose of natural skepticism help guide my ability to maintain a steady hand in the short term while also preserving a focus on long-term investment plans and financial goals.