Week Ahead: 3 Key Market Headwinds Remain Even After Trump COVID Diagnosis

 | Oct 04, 2020 07:16AM ET

  • Conflicting reports about Trump’s condition likely to leave investors uneasy...and suspicious
  • Markets still face three primary headwinds
  • Dollar stronger, gold weaker, Treasuries fall

    • Conflicting reports about the US president's health could trigger additional market uncertainty as this coming trading week begins on Monday. As well, renewed Congressional efforts in Washington to reach a compromise on fiscal stimulus will likely amp up volatility.

    Comments by House Speaker Nancy Pelosi on Friday, that she would work to find compromise with Republicans on a stimulus bill, helped indices trim losses after news broke before the day's market open that President Donald Trump had tested positive for COVID-19. Though all major US indices—the S&P 500, Dow Jones, NASDAQ and the Russell 2000—finished the week lower, losses on the SPX were cut in half post Pelosi's remarks.

    h2 Three Headwinds, One Additional Uncertainty/h2

    However, on Friday night, after trading closed for the week, Trump was hospitalized. In a video filmed in his hospital suite, "Trump told Americans that the next few days will be the 'real test' of his treatment." Reports concerning his condition have been conflicting. The president's doctors have said he's doing “very well” and is fever-free, but one assessment by a senior White House official noted, "we're still not on a clear path to a full recovery."

    Whatever the ultimate outcome, expect Trump to ramp up his anti-China rhetoric, since he's has been blaming the Asian nation for the virus for months now. We’d be surprised if Trump doesn't frame this as personal; he’s been trailing in the polls, making it all but certain he'll leverage this to marshal his base by finding an enemy in China.

    Notwithstanding what the president may say, the three significant headwinds he continues to face heading into the November election aren't going to disappear anytime soon:

    1. Pandemic Management: The psychological impact of a president hospitalized for coronavirus brings this risk back into the spotlight, even after both markets and the US economy appear to be recovering from much of the damage wrought by the pandemic. Still, fresh cases across the country persistently remained above 40,000 a day last week, roughly 38% higher than April levels when widespread lockdown measures were in effect.

    Clearly, the pandemic is an ongoing presence, an economic, market and societal pressure. Though progress has been made toward an effective vaccine, a useable inoculation, not to mention a cure, has not yet been invented. And even when an effective treatment does emerge, we're not totally optimistic it would work against a virus that continues to mutate, nor that distribution will be able to efficiently allocate the drug to much of the world.

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    2. Slowing Economic Recovery: Friday's nonfarm payrolls release disappointed. The headline number showed only 661,000 jobs were created in September, versus 850K expected. On the face of it, the overall print did show an improving labor market, with the unemployment rate beating estimates, coming in at 7.9%.

    However, the slowing momentum on jobs creation, which was about 200,000 short of consensus estimates, is of concern. Plus the headline number was weaker than the revised 1.5 million jobs added in August. In the final analysis, after five consecutive months of job gains, there are still 6.8 million more unemployed US workers than in February, before the pandemic.

    Moreover, this week past week, Disney (NYSE:DIS) announced layoffs even as the major US airlines anticipate looming reduncancies.

    3. Republicans And Democrats Unable To Agree On Additional Stimulus: The strongest equity rally in decades, since the March bottom, was largely due to aggressive global fiscal stimulus. The US Federal government injected almost $4 trillion in an effort to lubricate the country's economy, pulled by the pandemic into the worst recession since last century's Great Depression.

    Even after US central bank officials pleaded with lawmakers to launch badly needed additional stimulus to prop up the flagging economy, the two parties remain divided on the amount necessary to sustain the recovery without needlessly inflating the country's already ballooning debt, its highest since WWII.

    Though last week the majority, Democrat-led House of Representatives passed a $2.2 trillion coronavirus bill, edging closer to the $1.6 trillion plan floated by the White House, doubts remain whether the majority Republican Senate will agree to that number.

    With Trump's positive diagnosis and all its implications for political instability, it’s unclear how additional stimulus now might actually boost jittery markets already braced for chaos even before Trump's illness added a huge dollop of uncertainty.

    h2 After Turbulent September, Markets Still Skittish/h2

    Last week equities finished a turbulent September down 4%, as the six-month rally from the March low took a breather. On Thursday, we said the S&P 500 is likely to retreat after completing a return move to a rising flag.