Risk Returns To The Markets

Before we get to our weekly review of the stock market's fundamental backdrop, there are two important news items to take in, both of which can be viewed from a macro/fundamental lens.

First, there is the headline that the U.S. President and First Lady both have tested positive for the coronavirus. Although the word out of the White House is both are well, the New York Times is reporting the president is showing mild symptoms.

Stock futures fell overnight on the news as uncertainty over the functioning of the U.S. Government. We all know how the market hates uncertainty. Not surprisingly, stocks have opened lower and a "risk-off" mood seems to be developing. This is certainly understandable since it now appears there is what traders like to call "weekend headline risk" in the mix here.

From a macro point of view, the fact that the president has now contracted the virus puts the state of the health crisis back on the front page. While most everyone would prefer to think that we are rounding the corner on this thing and that it will soon be in the rearview mirror, the simple fact of the matter is that health experts continue to tell us that COVID-19 remains a serious problem – both in terms of health and economic risks.

Which brings us to the second news item of the morning: The jobs report. The headline is the economy created 661,000 new jobs during the month of September and the unemployment rate fell to 7.9%. The good news is the unemployment print was ahead of the consensus estimate for a rate of 8.2% and August's reading of 8.4%.

U.S. Unemployment Rate.

Image Source: WSJ.com

The bad news is (a) the number of new jobs created last month was well below expectations, and (b) after what is being touted as a V-shaped rebound, the economy has recovered only 11.4 million of the 22 million jobs lost in March and April. So, as the chart below illustrates, full recovery remains far away.

U.S. Nonfarm Payrolls.

Image Source: WSJ.com

For those keeping score at home, September's new jobs total was the first time since April that net hiring was below 1 million. So, again, I think it is important to keep in mind that job growth is s-l-o-w-i-n-g and that meaningful growth from here could be challenging until a vaccine is widely distributed.

My apologies for the Negative Nancy tone here, but one of the nagging issues in the back of my head during the second half of this year has been the massive level of unemployment. While the popular thinking is that all those jobs lost will eventually return, I've read numerous research reports suggesting that they won't. And from my seat, this could become a major impediment to the economy returning to pre-COVID levels.

As such, traders can't be blamed if they start to curb their enthusiasm. For me, today's headlines support the idea that the stock market remains in a consolidation phase. Therefore, I'm not going to be surprised if stocks continue to trade in a wide range and with an elevated level of daily volatility for the next month or so.

Now let's check in on our Fundamental Factors indicator board.

The State of the Fundamental Models

There are no changes to the Fundamental Factors board again this week. To review, monetary conditions remain positive and supportive, the economic composite is holding steady, earnings remain negative but are starting to tick higher from the post-COVID lows, inflation remains something to watch, and valuations remain at extremely high levels. All in, my view is the board continues to favor the bulls from a big-picture, intermediate- to long-term standpoint.

Fundamental Factors.

* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR. Past performances do not guarantee future results or profitability.

Thought For The Day:

Expectations are the root of all heartache.
- William Shakespeare