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Keeping An Eye on Heightened Volatility

Partisan political divisions in the US have delayed emergency fiscal action for more than three months, despite the benefits of a further boost to the US economy and the need for specific aid to certain industries (e.g. airlines). The aid is needed to support workers and parts of the economy that are still highly impacted by COVID-19 before a vaccine solution brings the pandemic to an end. With days to US elections, the chances of Congress passing a pre-election stimulus appear low. It seems more and more likely that the US Presidential election could get in the way of any agreement, perhaps until January.

 

Resilience and vulnerabilities

While the overall US economy has performed close to Citi analysts’ expectations, the labor market recovery has been even faster and stronger. The economy’s adaptations to COVID-19, with consumer goods purchases surging and millions of jobs saved with telecommuting has erased more than half of the 22.2 mil net job losses since April.

 

Below the surface, the net job gains masks severe and unusual turmoil, as unemployment insurance claims (a typically reliable indicator for gross layoffs) has remained high and troubling, due to an unprecedented pace of firing and hiring. A moderate rise in permanent job losses has also been masked by a sharp rebound from temporary job losses.

 

There is a possibility that the US economy may enter winter with many vulnerable individuals and weak sectors of the economy in sustained distress for at least three months.  

 

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What this means for markets in the coming quarter and the year ahead

Winter has not yet begun, and the interactions between open or partially open schools and restaurants and plunging winter temperatures are unknown in terms of spreading COVID-19 virus. There are also no guarantees that a clear outcome for the Presidential election could emerge by November 4.

 

Much of the near-term (3 months) is unlikely to be a period of strong clarity on the direction of US policy or the end point of COVID-19. This suggests potential bouts of financial market volatility could return before stronger prospects seen for 2021 are clear. 

 

Looking ahead to 2021 – assuming eventual passage of US fiscal stimulus – the combination of pent-up consumer demand, greater global trade and a COVID-19 vaccine could provide a great deal of fuel for an above-average recovery from a short, sharp recession.

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