The bitter end for Trump, an NFP report and a good day for US stocks
This headline should not exist, after the events on Capitol Hill earlier this week and the storming of the world’s oldest and most powerful seat of Democracy, the Nasdaq should not be up more than 2%, however that is the strange world that we live in. To make the mix even more complicated, Friday’s Non-Farm Payrolls report is expected to show that a mere 71k jobs were created in the US last month, which would be the lowest level since April. How does one navigate these markets, and what opportunities are there when we cut through all of the noise?
Predicting payrolls
Trying to guess how weak or strong the US labour market is on a monthly basis is a fool’s game. Predictions for NFPs have been inaccurate, ours included, which makes it hard to know how NFPs will swing from one month to the next. However, the lead indicators, which can be useful at suggesting how NFPs will perform ahead of time, are pointing to a weak report for December, with the prospect of a net loss in jobs for the end of 2020. Firstly, the employment component of the non-manufacturing PMI report fell into negative territory last month to 48.2 from 51.5 in November. Secondly, the ADP report, which measures private sector payrolls, contracted for December, with 123k jobs lost last month. Lastly, the four-week moving average of initial jobless claims rose to 837k, which is up nearly 100k in a month. This does not bode well for payrolls, and looking at a wide range of employment indicators, we think that there is a real chance that payrolls could be negative when they are released at 0830 ET/ 1330 GMT on Friday.
What would negative payrolls mean for financial markets? We think that this could sink the dollar, which rose slightly on Thursday. USD/JPY is not looking too oversold, especially in comparison to some of the other major dollar pairs, thus we could see a return to the 102.70 lows reached on Wednesday, when the Capitol Hill was being stormed by right-wing protestors, egged on by President Trump. Alternatively, if we see a better than expected number, which we view as a low probability event right now, then GBP/USD and EUR/USD both look stretched to the upside and have started to come under some pressure on Thursday and they could fall further as we end the trading week.
Teflon stock markets
Stocks, however, are likely to remain immune to bad US economic news in the short term. This is because the markets have decided to wholeheartedly adopt the optimistic narrative around the outlook for the US economy and the blue wave that has (finally) taken control of the US Senate after a vote run-off in Georgia was won by the Democrats. While it is likely that this will fuel a fiscal spending boom and inflation down the line, it could also herald in an era of tax rises to pay for the fiscal spending, a US debt-to-GDP ratio above 100%, and tighter corporate regulation, especially for the tech titans that have prospered mightily during this pandemic. The prospect of Democrats controlling the Senate, the House of Representatives and the White House, sent the US Treasury yield above 1% for the first time since March. This is big news, rising Treasury yields means that the hunt for yield does not need to exist merely in the equities space, investors can find it in bonds too. Thus, if we see the benchmark 10-year Treasury yield remain above 1%, or higher, for a consistent period, then we could see stocks start to struggle.
What’s next for stocks
When Treasury yields rise, we would expect this to be good news for banking stocks, it would also herald a return to a more normal economic environment, even one fuelled by government spending, which could boost some of the unloved sectors such as energy and industrials. We could also see the dollar fall further, as the market gets flooded with dollars, this could be good news for emerging market currencies. It may also be good news for the pound, which remains one of the top performers in the G10 one week into 2021. We don’t think that rising yields would be good news for some of the tech titans that have seen their valuations soar this year. When bond yields rise it makes companies with high P/E ratios less attractive. While this could hurt the likes of Amazon, Apple and Tesla, we actually think that this will hurt the newbie tech giants, who had epic IPOs at the end of last year. For example, Airbnb and DoorDash. Their track record and profitability just won’t look as good when higher Treasury yields are firmly entrenched in investors’ minds. However, that is a problem for another day, on Thursday, DoorDash was up 9%, while Airbnb was up 5%. However, if we do see investors turn against the tech sector, then these stocks, along with Snowflake, could struggle later this year.
But what about Covid?
We would caveat our idea that tech could be in for a challenging time in 2021, by noting a couple of risks that could keep tech in demand for the short to medium term. Firstly, if there is another security breach in Washington leading up to President-elect Biden’s inauguration on 20th January, then Treasury yields could fall back below 1%, boosting the attractiveness of growth stocks. Secondly, covid is back in the US and it is likely to experience the same pressures that we are currently seeing in Europe in the next couple of weeks. On Wednesday, 4000 Americans died of Covid. Combined with a slow roll out of the vaccine across the US, the pandemic has not gone away and it may continue to dominate our investment decisions for some time.