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Review the latest Weekly Headings by CIO Larry Adam.

Key Takeaways

• Some industries have reached a recovery ‘stalemate’
• Labor market still trying to ‘maneuver’ COVID-19
• Congress still going ‘head-to-head’ over stimulus deal

Tomorrow is National Chess Day, a holiday that has been in existence since its proclamation by President Gerald Ford in 1976. He described chess as a game that “sharpens the mind” and “tests human faculties,” and one could argue that the COVID-19 outbreak has done the same for our nation. Just as your opponent’s next move is unknown, the true nature of the virus and the magnitude of the inevitable recession were unknown, leading health experts, policy makers, and government officials to devise strategies and tactfully make decisions with the information available at the time. The game of chess is often a prolonged back and forth exchange of power, with both players manipulating their pieces to the most advantageous positions and hopefully avoiding any errors in the process. The initial efforts by policy makers positioned the economy for a robust rebound off the depressed levels, but there are still many moving pieces in order for the economy to return to pre-COVID levels.

• A COVID-19 Checkmate For Certain Industries | Our projection for a ‘ K-shaped’ economic recovery is rooted in the view that different parts of the economy will recover at varying paces and magnitudes as certain sectors were inherently better positioned to defend against the COVID-19 outbreak from the start. Since mid-summer, the recovery for the bottom portion of the ‘ K’ has reached a stalemate, with industries such as hotels, airlines, and restaurants still plagued by weaker demand due to psychological barriers and/or necessary social distancing protocols. In fact, our recent quarterly Investment Strategy Survey** found that only 65% of respondents would feel comfortable visiting a restaurant by year end, and even fewer would consider flying on a plane (~49%) or attending a crowded sporting event (~17%). In addition, with nearly 100,000 permanent business closures already announced, additional fiscal stimulus is needed to prevent a dramatic increase in these numbers to keep these small ‘pawns’ on the board. Unfortunately, there continues to be a dichotomy between these struggling ‘Main Street’ small businesses and the equity market (S&P 500) that has rebounded strongly year-to-date. Third quarter earnings season, which ‘unofficially’ begins next week, should continue to show that larger capitalization companies, especially in Tech, Communication Services, Consumer Discretionary and Health Care—all at the top portion of the ‘ K’— have weathered the pandemic successfully.
• Labor Market Conditions Need To Improve Across The Board | Successful chess players take time to fully analyze the board, ensuring that their next move is the most beneficial, even if it is not always the most obvious choice. This in-depth analysis is important in assessing the true strength of the labor market, as while initial claims below the 900k threshold for six consecutive weeks and the unemployment rate falling to a post-COVID low of 7.9% are moves in a positive direction, there are still signs of weakness beneath the surface. The aforementioned differing recovery paths has inherently caused certain subsectors of the labor market to experience varying difficulties in obtaining and maintaining employment. As of the week ending September 24, job postings in the US were down ~20% since the start of the year, but the leisure and hospitality industry is lagging, down ~35% in comparison. These differentials are evidenced in the unemployment rate for various income brackets as the rate for lower income earners (less than $27,000) is ~2.4x higher than the average and nearly 10x higher than that of higher income earners (more than $60,000). These lower income jobs are associated with the industries facing the worst of the decline. And that is the reason the Federal Reserve has pledged to adopt an accommodative stance for as long as necessary and focus on how their policies can reduce the ongoing economic inequality.
• Congress Needs To Avoid A Big Blunder | In the game of chess, a serious blunder can occur after a tactical error, whether it is due to timing, overconfidence, or pure carelessness. Both parties are looking to capture a stimulus ‘win’ before the upcoming election, and while we never say never in an election year, a comprehensive deal is more likely to occur after the election, which could result in the Phase 4 fiscal package being a mistimed move. There are still 24 days remaining until the election, and if Congress is still divided after the fact, additional time may be needed for a deal to be reached for US consumers, businesses, and the local governments to receive any aid. Earlier this week, Fed Chair Powell once again expressed the need for further stimulus, stating that the risks of overdoing it seem to be smaller than shortchanging the recovery that in his view, has already rebounded quicker than expected but remains vulnerable. When it comes to the US economy, the consumer, which accounts for ~70% of US GDP, is the ‘king.’ If additional supplemental unemployment benefits and/or a second round of stimulus checks is provided after the critical holiday spending season (which is beginning in earnest earlier this year—Amazon Prime Day and competitor matching programs are next week), the economy could miss an advantageous maneuver that could reignite the recovery’s momentum.

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