Jobs, Markets and Midterm Elections

The October employment report was not just good, it was great. The economy added 250,000 jobs, the unemployment rate remained at a 49 year low of 3.7 percent and workers enjoyed the best annual wage growth in nearly a decade (April 2009). In fact, average hourly wages increased by 3.1 percent from a year ago, the first time since the global financial crisis that earnings growth has surpassed 3 percent. Economist Joel Naroff added, “every major sector posted a gain and job increases were reported in 65.7 percent of the 258 industries. In other words, the increases were broad based.”

I know what you’re thinking: If the report was so good, why did stocks fall? The strength of the labor market, especially the accelerating wage growth, makes the case for another Federal Reserve interest rate hike in December, and possibly an additional two to three more next year. Higher rates can put pressure on companies and individuals who must pay more to borrow and the increase of yields can also lure investors into the relative safety of the bond market.

Additionally, Apple stock dragged down the indexes, as investors worried that the company’s outlook for the holiday quarter was not as strong as expected. Apple fell 6.6 percent on Friday, the worst drop since January 2014. Before you worry too much, Apple remains up 23 percent year to date.

ELECTIONS

Historically, midterm elections are all about the economy. With unemployment at multi-decade lows, wages trending higher and the economy likely to expand at the best pace in over a decade, one might expect a Republican edge. But the past may not be an adequate guide this time around.

The polls indicate that Democrats will regain the House and Republicans will maintain control of the Senate. (Of course polls provide a statistical analysis and voters learned valuable lessons about probability during the 2016 election.) If that’s the case, don’t expect a repeal of the Tax Cuts and Jobs Act. However, there could be bipartisan negotiations on certain aspects of the law that are due to sunset in 2019, like certain tax credits for family leave and the expanded deduction for medical expenses.

Congressional Democrats will also likely call for increasing corporate and individual tax rates, but with a Republican President, those proposals will go nowhere fast. Additionally, if Democrats were to capture the House, they would not be able to stymie the Republican deregulatory efforts that have helped big industries like energy, banking and transportation, among others.