• Greg Richardson

Markets rally on strong jobs report as vote counting continues

We still don't have an official winner in the United States Presidential Election, but Wall Street doesn't seem to mind. On pace for the markets' best performances since April, tech has led the way this week spurring the Nasdaq to a nearly 9% gain leading into Friday morning. The Dow Jones and S&P 500 were both up 7% heading into Friday.

FAANG stocks performed exceptionally well with Facebook shares seeing a 12% gain this week with Amazon and Apple both gaining more than 9% each. Microsoft, meanwhile, jumped up by more than 10%.

As votes were still being counted Thursday afternoon, the markets started pricing in the possibility of a Biden presidency with a Republican Senate. Futures fell slightly as the counting continued with no clear winner announced. Typically, it's beneficial for investors to have a divided government because the president is limited in power to change the current system. One investor told CNBC, "More than anything, the market is looking for a peaceful transition of power."

The bond market took a sharp turn the day after the election, with the yield on the 10-year Treasury note dropping 9 basis points to 0.766% on Wednesday. That was its lowest level since October 18. Friday morning’s yield on the 10-year note was hovering right around 0.766% as the country waits to hear final results from the election.

While the votes wait to become official, the market rallied Friday morning in reaction to the latest Jobs Report from the Labor Department. Nonfarm payrolls added 638,000 jobs in October which helped push the unemployment rate down to 6.9%. That was significantly better than what economists had expected, with the unemployment rate a full percentage point lower than in September.

The news rippled through Wall Street with Dow futures erasing a 200-point loss in early Friday trading to move slightly higher. The S&P 500 and Nasdaq futures also gained back some ground, down just 0.1% and 0.5%, respectively. The yield on the 10year Treasury note responded in kind, moving to 0.815% in early trading hours.

The ADP private payroll report showed a distinct slowdown in the month of October. According to the ADP/Moody's Analytics report, private companies added just 365,000 jobs in October. That figure comes in far below the 600,000 expected by economists in a survey by Dow Jones. This is the lowest number of job gains reported by the ADP since July.

Meanwhile, weekly jobless claims from the Labor Department show a continued decline that is moving at a snail's pace. More than 750,000 Americans filed initial unemployment claims this past week. The transition from people making continuing claims to making claims under the Pandemic Unemployment Assistance program continues as many Americans have reached the end of their allotted 26-week assistance benefits. The PEUA program saw an increase of more than 275,000 applicants to 3.96 million in total. Continuing claims fell by nearly 540,000 and now sit at 7.3 million in total.

FED STANDS PAT

Short-term borrowing rates will hold at 0%-0.25% as the Federal Reserve holds strong in its assessment of the U.S. economy. While Fed Chair Jerome Powell recognizes that the economy is still "well below" levels prior to the pandemic, he believes the Fed is not out of options just yet. In his post-meeting press conference, Powell stated, “Is monetary policy out of power or out of ammunition? The answer to that is no, I don’t think that. I think that we’re strongly committed to using these powerful tools that we have to support the economy during this difficult time for as long as needed and no one should have any doubt about that.”

This latest decision by the Fed to keep interest rates steady was a unanimous one among committee members. This latest statement, while slightly downgrading the language used to describe the economy, did not indicate any changes to the "flexible average inflation targeting" approach that was agreed upon in meetings earlier this year.

HOMEBUYING IN AN ELECTION YEAR

How will this election affect the housing market? If you look at things historically, get ready for another boom. According to data analyzed by Meyers Research over the past 13 election cycles, November of a federal election year sees a 15% dip in sales activity. But, “the year after a presidential election is the best of the four-year cycle. This suggests that demand for new housing is not lost because of election uncertainty, rather it gets pushed out to the following year as long as the economy stays on track.”

Helping keep housing on track are consistently low interest rates, For the twelfth time this year, mortgage rates have hit an historic low. The 30-year fixed-rate mortgage average from Freddie Mac dipped again in the last week, hitting 2.78%. Freddie Mac's Chief Economist, Sam Khater, attributes the low rates to continued economic and political ambiguity. However, Khater adds, “Despite the uncertainty that we’ve all experienced this year, the housing market, buoyed by low rates, continues to be a bright spot.”

The drop in rates spurred a lot of refinance activity with the Mortgage Bankers Association Refinance Index showing an increase of 6% week-over-week. Refinance activity was 88% higher than this time a year ago. Purchases have slowed from their hot streak, however. The MBA's Associate Vice President of Economic and Industry Forecasting, Joel Kan, said in his weekly release, "After a solid stretch of purchase applications growth, activity decreased for the fifth time in six weeks, but was still over 25% higher than a year ago, and has increased year-over-year for six straight months. 2020 continues to overall be a strong year for the housing market."

There is a lot of speculation about what will happen with the housing industry, depending on who takes over control of The White House. A big unknown is the fate of government sponsored enterprises Fannie Mae and Freddie Mac. There has been a push over the last couple of years by Federal Housing Finance Authority Director Mark Calabria to remove the GSEs from conservatorship. That move would make the two companies public again. Recent changes in how the GSEs can retain capital, along with the implementation of a revenue-driving adverse market fee, have been made in order to help Fannie and Freddie build a sustainable capital in order to move back into the public sphere. As it stands, Calabria will remain the FHFA director until 2024. He expects Fannie and Freddie to exit government conservatorship by 2022 or 2023.

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