Andrew Sheets: Welcome to Thoughts in the Market, I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley Research.
Ellen Zentner: And I'm Ellen Zentner, Chief U.S. Economist. And on this special edition of the podcast, we'll be talking about the impact of the U.S. election and the coronavirus pandemic for both the economy and markets. It's Friday, November 6th, at 9:00 a.m. in New York.
Sheets: And 2:00 p.m. in London.
Zentner: So, Andrew, overnight, Vice President Biden took the lead in Georgia and he just pulled ahead in Pennsylvania. Now, this would put him within striking distance of the presidency, although, as we've all learned, nothing is for certain. But let's talk hypothetical here and say the Vice President wins the White House. Given what looks like a divided government scenario, how should investors be looking at asset classes and regions right now?
Sheets: Thanks, Ellen. So, first, as important as a presidential election is, there remains a bigger story that we think is also unchanged, that the broader global economy is going to continue to recover and that the global equity and credit markets remain in a bull market. And we think those were forces that were in place before the election and will remain in place after the election. I think this is also an election that could have important implications for the U.S. dollar and other foreign currencies. Foreign policy could be very different under a Biden administration. And we think those factors and a few others could generally mean that we see a weaker U.S. dollar than we saw previously in somewhat more strength in other major currencies.
Zentner: So one thing that struck me as interesting was that the VIX volatility index fell 15% on Wednesday, another 5% yesterday, although it's ticked up slightly this morning. But were markets more worried about the election uncertainty than coronavirus uncertainty? I mean, we're dealing with rising cases in the U.S. we're nervously eyeing Europe. But what does the movement in VIX tell you about the balance of focus from investors election versus coronavirus?
Sheets: Yeah, that's a great question. Honestly, It's a little bit hard to unpack because you're absolutely right. But I also think it's important to note that, you know, in our view, the VIX was also very high, even with those uncertainties out there. You know, at the end of October, you had, you know, a level of expected uncertainty, expected volatility that was kind of near the highs of the last 10 years. And we've obviously had a lot of uncertainty over the last 10 years. So I think a good thing is that the markets were bracing themselves for quite a bit.
Sheets: I do think what will be interesting, though, and that we'll need to watch is that the election news has temporarily pushed the coronavirus news off the front pages, so to speak. And so, you know, we will need to watch, as you know, when a winner is declared that the focus might come back more to the rise in case cases, which continue to pick up and which do point to a more troubling trend into the winter.
Sheets: So Ellen, speaking of the coronavirus, I think there's a knee jerk question in markets that if we're going into a third wave in the winter, won't that kind of obviously kind of, without question, be extremely bad for economic activity? But, you know, there are some signs that, you know, the economic effect of this, the consumer effect of this, as you mentioned, is kind of moving in real time.
Zentner: Yeah, that's a good way to put it. I mean, consumer spending is going to slow over the winter and that is in our forecast. Yeah. We assume that sequentially it softens over the winter because if you're going to have some selective lockdowns at least, and some households that become more cautious about, say, going out to dine, right, then services spending can be sort of a drag through the winter. But again, going back to that, you know, households still wanting to engage in in economic activity, even if they can't spend a lot in the services area, you know, nondurables and durables goods spending already reached pre-COVID levels back in June. It's just services that's lagging in services that will probably be the weakest part over the winter. But I think folks will continue to be surprised overall at how households manage this second wave.
Sheets: So, Ellen, that actually takes me to my next question, which is that on the one hand, you have this potential of a third wave of COVID cases heading into the winter, which, as you mentioned, is certainly going to be a drag and a risk to economic activity. And at the same time, you have seen some encouraging signs that the labor market is getting better. Even only about 30 minutes ago, the latest labor market report was out and suggested the U.S. added 638,000 jobs last month. So in the context of both of those things, how do you think about the importance of additional fiscal action, especially because, you know, the just completed U.S. election is potentially going to complicate that picture?
Zentner: Yeah. So here I am, right in line with the chair Powell's Fed chair Powell's thinking on further fiscal support for the economy. I mean, at the outset you could look at GDP is quite positive. The unemployment rate has been falling sharply. Jobs are still growing beyond expectations. And we saw that in today's report. And so one could say, well, we don't need further fiscal stimulus. The economy can stand on its own. And to some extent, it is true if you're just looking for, GDP to be positive, yeah, we can put up positive GDP. Simply, if the path of COVID plays out as expected and we move toward a vaccine, you're going to have positive GDP. But I think it's important to look under the hood here. Labor force participation rates among women have fallen sharply as they've had to go home to take care of children. The unemployment rate among minority communities has soared, and we want that to come down more sharply.
Zentner: You know, if you look under the hood, there's a lot of longer-term unemployment here that that does hold the prospect of becoming entrenched. You know, the longer someone is unemployed, the greater the lower the probability that they ever come back to the labor market. And so you do actually need to juice the economy as much as possible to not only raise labor force participation rates, but to create enough jobs, more than enough jobs to absorb those new entrants back into the labor market. And I really think that's what chair Powell is getting at when he calls for more fiscal support. It's something that I see the need for as well. And I do believe that we will get something more out of Congress, even if it's the bare minimum for COVID related spending, even in a divided Congress.
Sheets: Ellen, another question I kind of want to ask you is, as we head into the winter, is that obviously the holiday shopping season, the fourth quarter is a really important quarter for the economy, for businesses. You know, it's called it's called Black Friday for a reason. It's historically the day when a lot of retailers move into the black, so to speak, when they become profitable. This is obviously going to be a holiday shopping season like no other. How are you currently thinking about consumer spending dynamics, just given how immensely important the consumer is to the U.S. economic picture.
Zentner: So I think the consumer is going to put up good numbers for holiday shopping this year, that may seem like an odd comment, but retailers have been very aggressive very early on this year in attracting dollars, attracting some of the stimulus dollars that are still out there, attracting the increase in labor income that we've seen in getting consumers to spend. So that started with an Amazon Prime Day in October that was successful. It forced other large retailers to do prime-day-like sales and then other retailers starting Black Friday on November 4th, if you can believe that. And so I think that that's going to continue to support spending and not only as we've seen in October, but can provide some support through November. But what happens if you've pulled a lot of demand forward that would have happened in the month of December. So I think overall, you still get a decent quarter for consumer spending on the back of retailers being very aggressive. But I think to some it sets December up for quite a quite a drop off in spending because you've you have pulled a lot of that forward. So I think that's something that we should be mindful of. But the bottom line is the dollars are out there. Retailers just need to attract it. And so far, consumers still be still appear to be willing to spend it.
Sheets: Ellen, great talking to you, as always.
Zentner: Great talking with you, too, Andrew.
Sheets: Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show.