Morning Notes — Market Internals

Jobs: September headline net job additions missed, coming in at +661,000 vs consensus for +850,000 but other components of the report were solid. Private payrolls increased +877,000 vs consensus for +850,000 and the Unemployment Rate fell to 7.9% vs consensus for 8.2%, but maybe for the wrong reasons with the participation rate declining to 61.4% from 61.7% in August.  The industry with the largest employment gain was leisure and hospitality, up +318,000, while the biggest decline of 34,000 came from federal employment due to the loss of temporary workers who had been hired for the 2020 Census.    

Election: Two sell-side strategists this week tried to make a bullish case for a Democrat sweep based on expectations for massive fiscal stimulus.  Unfortunately, the US fiscal deficit is already ~16% of this year’s GDP and tracking to ~8% next year assuming no incremental spending.   Assuming vaccine developments go according to plan, I doubt the public will have much interest in taking deficits higher.  Markets prefer a division of power and the Biden/Democrat tax plan would be a headwind for equities with: 1) higher corporate rates of 28% vs 21% today; 2) the 12.4% payroll tax expanded from income earned under $137,000 to include income earned over $400,000 as well; 3) top marginal rate for individuals to 39.6% from 37% today; 4) households making over $1,000,000 would have Long Term capital gains and qualified dividends taxed as ordinary income and; 5) the step-up in basis, which revalues assets to the time of inheritance without incurring tax liability would be eliminated. 

SPX: Market internals are healthy this morning with the S&P 500 Equal Weighted Index (SPW) outperforming the market cap weighted S&P 500 (SPX) by ~80bps on cyclical/value sector leadership. The primary drag on the SPX comes from super-large cap Tech (think FAANG) that has recently and temporarily transformed into defensive proxy.  The SPX has held our ~3220 technical support level and now above initial resistance at ~3350.  It’s encouraging but needs to be watched very closely in the days ahead.  The near-term wildcard is a pre-election stimulus relief bill with the probability of compromise improving overnight.