Beltway on Speed Dial: Wall Street Senses New Stimulus Amid Threats of More Layoffs

Banks, travel, and leisure stocks could get a lift today as investors sense better chances of another fiscal stimulus package emerging from Washington. Meanwhile, jobless claims remain high ahead of tomorrow’s payrolls report.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/White House: Flat ahead of debate
5 min read
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Key Takeaways

  • Fresh stimulus hopes have Wall Street in rally mode to start the quarter

  • Trading could be volatile today as investors await tomorrow’s payrolls report

  • Jobless claims fall to 837,000 from 873,000 a week ago, but remain stubbornly high

(Thursday Market Open) Leaves are turning orange and red but Q4 begins with Wall Street tinted green as investors build in fresh hopes for another fiscal stimulus package. 

It feels like there might be new enthusiasm to get something done in D.C. following recent headlines that American Airlines (AAL) and United Airlines (UAL) could furlough more than 30,000 employees starting today when they run out of federal aid. This follows Walt Disney (DIS) laying off 28,000 people earlier this week. 

These potential and actual layoffs and furloughs raise fears of the economy skidding into an even deeper tailspin right ahead of the election, and could really put pressure on politicians to do something. We’re talking about good-paying jobs possibly being lost. Still, it’s probably smart to be skeptical, because a lot of hurdles remain for a package to pass Congress and get signed by the president. As the saying goes, hope for the best but prepare for the worst.

Headlines from Washington could dominate discussion as the day advances, with companies and sectors most sensitive to economic recovery on “stimulus-watch.” These include some of the travel and leisure stocks that rose yesterday as fiscal hopes flared. Airlines, cruise operators, hotels, casinos, and restaurants all could get a jolt if it looks like there’s progress, or could go the other way if talks sputter.

Financials are another sector to watch, since they’d likely see their businesses benefit from Washington greasing the economic skids. Some of the stimulus hopes could be reflected in the bond market, where the 10-year Treasury yield hit 0.7% in the hours before the opening bell.

At the same time, gold moved higher in the early going, which is a little strange when you consider all the strength in the market and weakness in bonds. It’s possible people could be using gold to hedge tomorrow’s payrolls report, but generally gold has been behaving strangely lately and that continues. Mark it down as something to keep an eye on. Crude also didn’t get any lift from stocks early on and fell back below $40 a barrel, which isn’t a good sign. 

Before any moves from Congress, investors got a look at weekly jobless claims. The headline figure of 837,000 was a little better than the 850,000 analysts had expected. The figure is down from an upwardly revised 873,000 a week ago, and any kind of progress is welcome. Also, continuing claims fell very nicely from the previous week. Still, it’s hard to get bullish about the economy when new weekly claims remain at these levels, especially when there’s a lot of worry about more layoffs in the news. 

Today’s weekly claims report is the appetizer to tomorrow morning’s feast in the form of monthly payrolls. Wall Street consensus is for a headline job growth number of 800,000 in September, according to research firm Briefing.com. That would be down from 1.37 million in August, perhaps reflecting a lack of government hiring and the winding down of last spring’s stimulus. 

Unemployment is seen falling to 8.2% from 8.4% last time out, and hourly wages are expected to rise 0.2%, Briefing.com said. That would be down from 0.4% in August. 

Tomorrow also brings another couple of readings on the economy, with factory orders and University of Michigan sentiment. The sentiment number could get a closer view than normal following this week’s huge positive surprise from the Consumer Confidence report. Most of the economic data lately have been relatively impressive, including a really strong Chicago PMI number yesterday.

Where’s the Roadmap Gone?

The market’s bouncing up and down like a jackrabbit so far this week, and with about as much sense of direction. 

Wednesday ended positive after a slow start, but there’s no real pattern here. The one thing that might have made a difference was the S&P 500 Index (SPX) finishing above its 50-day moving average for the first time in more than a week. This move could potentially draw more buyers, but that 50-day line near 3355 remains a key point to watch for more potential selling if the market falls back below it.

This week has brought a lot of Fed talk, and an interesting one happened yesterday as Dallas Fed President Robert Kaplan explained his dissent at the last meeting. Kaplan told CNBC he wants the central bank to have more flexibility, though he still thinks rates need to stay near zero for 2.5 to three more years. It could be that long until the economy gets on track to meet the Fed’s full employment and price stability goals, he said.

He reinforced what other Fed speakers recently said about the need for fiscal stimulus, too, giving his two cents on the consumer. “One of the unusual things about this pandemic has been consumer income and consumer spending has stayed resilient, and a big reason why is fiscal support,” Kaplan said. “I think it would create downside risk if we weren’t going to get that fiscal support.”

Hopes for exactly that appeared to help the market early Wednesday, and then hopes got dashed again around midday after less than cheery observations from the Senate majority leader. The major indices still finished up, but well off their highs. 

It could be noteworthy that once again, the Russell 2000 Index (RUT) of small-caps, which tends to be more reflective of the domestic economy, barely rose Wednesday. It could get a heftier boost from fiscal stimulus than some of the larger-cap indices whose companies pull more of their sales from overseas. That’s why it might be a handy barometer to watch when it comes to stimulus expectations.

Cyclicals, “Risk-Off” Outpaced on Wednesday Even as Bonds Fell

Some of the more cyclical and “risk-off” sectors like Utilities and Staples did pretty well yesterday and remain worth watching for any sign of a pattern developing. Financials got a lift at mid-week as yields clawed higher, but that sector’s had a lot of false starts and this could be another one. Health Care seems to be on the upswing lately, maybe due to some positive headlines about possible coronavirus treatments. 

DIS didn’t actually do too badly Wednesday despite the 28,000 layoffs it announced earlier in the week (see more below). Those layoffs really brought home just how far the economy still has to go. We all knew that the small businessman or restaurant owner was getting hurt, but this takes it to a different level of just how serious it is, and maybe changes the narrative a bit. 

Tech, in the meantime, hasn’t been able to regain its August mojo. The FAANGs, Microsoft (MSFT) and semiconductors generally did well yesterday, but there hasn’t been a nice string of daily gains like we saw in the summer. Valuation concerns might still be dogging this sector. 

Despite all the volatility concerns ahead of the election, the Cboe Volatility Index (VIX) doesn’t seem to be going anywhere this week. It spent most of Wednesday hovering right near the 26 mark. That’s relatively high historically, but nothing that would necessarily scare the children after reaching 80 last March. 

The volatility futures complex still shows a curve upward to as high as 32 by early November but no higher than that. This so-called “contango”—where futures prices are higher than spot—is probably election-related.

CHART OF THE DAY: NO LONGER ON WRONG SIDE OF 50. Once again, we draw your attention to this three month chart of the S&P 500 Index (SPX—candlestick) to show how it clawed its way back above the 50-day moving average (blue line) near 3355 yesterday. This line has been solid support and resistance for the market over the laast month, and probably remains the key support level to watch today. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

When it Rains Volatility, Is There an Umbrella? You’ve probably heard a lot lately about chances of October being volatile ahead of the election. Which sectors tend to do better or at least sometimes avoid some of the messiness in times of volatility? First of all, so-called “risk-off” parts of the market like Treasuries and the dollar are coming more into vogue, perhaps a sign of investors seeking possible protection. Treasury prices (which move inversely to yields), have been near all-time highs for months, and there’s a chance they could see continued buying into the election if things look close, though their low yields could be a barrier to that. The dollar recently clawed back from 18-month lows. Corporate bonds have also been having a relatively strong year, and some analysts forecast more strength in the final quarter. Corporate bonds tend to be riskier investments than Treasuries, though no investment is truly “risk-off.”

Sector Shift Smoke Signal: The stock market, too, has sectors that tend to be less jolted around by volatility than others—at least historically. Utilities, Materials, Real Estate and Consumer Staples come to mind, and most have underperformed the broader S&P 500 Index (SPX) over the last six months. As of earlier this week, Utilities were up just  6% over that stretch, Real Estate was up 13%, and Staples were up 19%, compared with 32% for the SPX. Only Materials beat the SPX over those six months. Barron’s recently reported that “Funds have been neutralizing their positioning in most sectors against what could be a cloudier backdrop into the U.S. election ... Long-only funds have added modestly to their materials, utilities, consumer discretionary and real estate exposure over the last three months.”

Layoffs 101: It seems fair to say that no one ever wants to see layoffs, especially in times like these. People are suffering throughout the country and have been for a while, which is one reason why news this week about Walt Disney (DIS) laying off 28,000 employees hurt so hard. Still, shares of DIS only dropped slightly the day after the announcement, and sometimes you see stocks actually rise with layoffs. 

That’s because planned layoffs can be strategic for a company, allowing them to do more with less. It’s actually a sign of corporate mismanagement to have employees you don’t need, as that can eat into profit margins, raise costs, and potentially limit research and development funds for new competitive products or improved existing ones. As an S&P 500 corporation once told its employees, “No one is owed a job.” That sounds harsh, but it’s also true and arguably necessary for everyone to remember, as a worker or an investor.

In a growing economy, laid-off workers from one company would hopefully find work soon somewhere else and the market would interpret the layoffs as a sign of corporate efficiency. However, the DIS layoffs affected a significant portion of its workforce and could mark a material change to the outlook of its core business, so they were viewed—initially anyway—as a signal of weakness to come. Also, right now, with the economy still suffering from the pandemic, it’s going to likely be harder for those DIS employees to avoid the unemployment lines. It’s another unfortunate consequence of this troubled year.

Good Trading,
JJ
@TDAJJKinahan

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This week’s economic calendar. Source: Briefing.com
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Key Takeaways

  • Fresh stimulus hopes have Wall Street in rally mode to start the quarter

  • Trading could be volatile today as investors await tomorrow’s payrolls report

  • Jobless claims fall to 837,000 from 873,000 a week ago, but remain stubbornly high

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