TSP

The market has taken this data in stride so far, because on one hand it’s very bad for company fundamentals, but on the other hand, the weaker the data are, the more it spurs policymakers to do another round of stimulus which tends to benefit risk assets.

Lyn Alden

This has been quite a news week for markets.

President Trump tested positive for COVID-19 and was hospitalized to ensure adequate treatment. This puts him in a small group of world leaders, including those of the United Kingdom, Brazil, Honduras, Guatemala, and Armenia, that have contracted the virus this year.

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This rattled markets a bit, but not to an unusual degree. Forward-looking options markets have already been pricing in elevated volatility during the upcoming election, likely due to a higher-than-normal likelihood of a contested election and general uncertainty during that period.

On the other hand, political leaders indicated that the probability for a second stimulus before the election is increasing a bit, which has a range of ramifications for the stock market.

Months ago, the two parties were at very different places. This summer, the Democrat-controlled House of Representatives passed a $3+ trillion stimulus second round, although it was widely understood that it wouldn’t go further than that. Meanwhile, Republicans were offering the prospects for a $1 trillion stimulus.

That gap quickly narrowed in recent weeks. The House passed a slimmed-down $2.2 trillion stimulus bill, while Treasury Secretary Mnuchin, negotiating on behalf of the White House, has offered $1.6 trillion. There remain key differences between the proposals about how much aid to states and local governments, and how much extra federal unemployment benefits to provide, but the numbers are now within the realm of compromise and Speaker Pelosi, Secretary Mnuchin, and Senate Majority Leader McConnell have all indicated that a deal could be close. Markets are watching.

Meanwhile, the choppy market as represented by the S&P 500 (which the C Fund tracks) is back in positive MACD territory, indicating (slightly) positive momentum, although it remains just below its 50-day moving average.

Chart Source: YCharts

Job Market

Meanwhile, the job rebound continued to slow. Total payrolls had a sharp rebound in early months after the economic shutdown, but in recent months have begun to trend in a milder slope:

Labor force participation has been flat-to-down since June:

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Chart Source: St. Louis Fed

And the number of permanent job losses (rather than just furloughs) continues to increase at a rapid rate:

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Chart Source: St. Louis Fed

The market has taken this data in stride so far, because on one hand it’s very bad for company fundamentals, but on the other hand, the weaker the data are, the more it spurs policymakers to do another round of stimulus which tends to benefit risk assets.

It remains a very challenging time for investors, and diversification can help mitigate risks in either direction.

TSP: Trend Lines Show Bears Remain in Control for Now (Sept 28)

TSP C Fund: Technicals Are Deteriorating (Sept 22)

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Lyn Alden is a financial writer and an engineer, and holds a bachelor’s in engineering and a master’s in engineering management, with a focus on financial modeling and resource management. She specializes in analyzing and presenting financial data. Her investment work can be found on LynAlden.com.