On the latest edition of Market Week in Review, Senior Investment Strategist Paul Eitelman and Rob Cittadini, director, Americas institutional, discussed the likely catalyst behind last month’s market volatility, the U.S. employment report for October and potential market impacts of the Nov. 6 U.S. midterm elections.
Are better times ahead for markets after a rough October?
With the books closed on a volatile October, last month’s nosedive in markets looks like a healthy correction rather than the start of a bear market or a prelude to an economic recession, Eitelman said. He believes that worries over lofty expectations for U.S. earnings drove some of the downturn, but noted that economic fundamentals in the U.S. remain pretty good. “With this in mind, while we probably can’t say deterministically that the market correction is in the rear-view mirror, there’s been more incrementally encouraging news the week of Oct. 29 that’s helped lift markets,” he said. For instance, a phone call between U.S. President Donald Trump and Chinese President Xi Jinping on Nov. 1, which Trump described as helpful in moving trade discussions forward between the two countries, led to broad gains that day.
Overall, as of mid-morning on Nov. 2, the S&P 500® Index was up roughly 2.3% the week of Oct. 29, with emerging markets surging 5.6% on the week, as measured by the MSCI Emerging Markets Index.
U.S. economy powers on with 250,000 job additions in October
The U.S. employment report for October, released Nov. 2 by the Bureau of Labor Statistics, showed a continued strength in the nation’s economy, Eitelman said. “The U.S. added 250,000 jobs last month—a figure which was well above consensus expectations, and more than sufficient to keep strengthening the labor market over time,” he stated. Eitelman added that the unemployment rate held steady at a 49-year low of 3.7%.
However, the news was almost a little too strong from the standpoint of financial markets, Eitelman said, as the latest numbers also point to more significant wage inflation. Average hourly pay rose 3.1% on a year-over-year basis, he said—the largest increase since 2009. “This is sparking concerns that higher wages could mean reduced profit margins for U.S. businesses moving forward,” he explained, “and it also means that the U.S. Federal Reserve is now much more likely to raise interest rates again in December.”
Midterms and markets: The likely reaction
Midterm elections in the U.S. Congress loom large for Nov. 6, Eitelman said, but he believes that significant, long-lasting market volatility is unlikely. Why? The existing pro-growth legislation spearheaded by the Trump administration and the Republican party—sweeping tax cuts, regulatory reform and increased government spending—will almost certainly remain in place, assuming current election projections hold. “Political forecasting models are largely pointing to a scenario where the Democratic party wins back the House of Representatives, while Republicans keep control of the Senate,” he explained, “and the resulting gridlock probably means that the already-enacted pro-growth measures of the Trump administration will stay in place.”
That said, the U.S. midterms are a big headline event, so some up-and-down swings in markets are possible, Eitelman said—just likely not from a change in fundamentals. “If there is volatility come Nov. 7, our team of strategists would likely view it as a short-term buying opportunity (if markets drop) or an opportunity to sell the rally, should markets move up,” he concluded.