U.S. Markets close in 3 hrs 35 mins

'Market tends to do well' with a split government: Economist

Jeffrey Cleveland, Payden & Rygel Chief Economist joins Yahoo Finance's Kristin Myers to break down the latest on markets and the Fed as we await election results.

Video Transcript

KRISTIN MYERS: Well, we do have a Fed decision coming imminently. So I want to bring on Jeffrey Cleveland, he's a Payden & Rygel Chief Economist, to talk more about this. Hey, Jeffrey, so I want to first start with what we are seeing right now in the markets.

I feel as if we always continuously hear the refrain that markets hate uncertainty. They hate uncertainty. They really hate uncertainty. And yet, as I'm looking at it, especially as we've been talking about these elections, all I see is uncertainty, uncertainty, and more uncertainty. So how are you explaining this rally that we're seeing, not just today, but honestly, all week?

JEFFREY CLEVELAND: Well, I think, in part, there was the expectation last week of this sort of blue wave. And the blue wave was going to bring with it maybe more fiscal stimulus, but at the same time, higher taxes, both on the high-net worth individuals, but also on corporations. And that did not materialize. Maybe we see a little bit of a blue shift here or a blue tinge, I don't know, but it's not a blue wave. So that fear is gone, so I think that helps.

And then markets, when you look historically, the last, you know, 3/4 of a century, divided government seems to point to better market performance. So if you do have a split between the party that controls the White House, the party that controls the Senate, for example, market tends to do well during those periods of time. The sample size is pretty small, in some cases, but divided government seems to be good for markets. So I think that, in part, is perhaps what is driving things here.

I think, also, I would add a more normal occupant of the-- of 600-- 1600 Pennsylvania Avenue, that doesn't hurt. That does reduce some of the uncertainty, I think. You remember well the last four years, at a Tweet's notice we could have some sort of market-moving event. So perhaps the market likes that idea as well. So there are three things to chew on there.

KRISTIN MYERS: So I want to talk now about the Fed. We should be getting a decision out of the FOMC meeting, which, of course, a lot of people had, I think, forgotten was even happening this week with the elections going on. They've largely said that they're going to be taking this wait-and-see approach.

I'm wondering how you perceive them reading some of the data, especially going forward with the next decision coming in December, as we have some really good economic data, we had a blow-out when it came to the GDP numbers, good manufacturing data numbers, but then, of course, we had these jobless claims coming in today, still alarmingly high, as millions, over 7 million folks, still remaining on unemployment?

JEFFREY CLEVELAND: Yeah, not only that, but the Fed, numerous Fed speakers, have emphasized the need for additional fiscal stimulus or fiscal relief. And if this divided government that we just talked about means that we don't have that fiscal relief coming, at least not anytime soon, I think that means that the Fed would be more concerned about the economic outlook. Not to mention, I believe today the virus data approaching highs for in terms of daily changes in number of cases, so that certainly will worry the Fed and their outlook.

All of this is-- you know, I think this argues for the Fed perhaps to do more. What would that entail, Kristin? It could mean, like the Bank of England did this morning, beefing up their quantitative easing, upscaling the number-- the scale of the asset purchases.

I don't think that means they need to unveil that here in the next six minutes, Kristin. Maybe they'd-- they'd much rather wait. I think they wanted to be the sideshow this week, and maybe they wait till December. But that might be the next move here for the Federal Reserve. Absent additional fiscal relief, the central bank could do more.

KRISTIN MYERS: So Jeffrey, I want to quickly ask you how you're seeing and you're perceiving the state of the economy right now? We are seeing it, of course, start to slow. Again, we did get those jobless claim numbers coming in today, 751,000 versus that 735,000 that had been expected. What are you anticipating, at least for the economy, over the next couple of months, especially as the Fed says, hey, we can only do so much, we need Congress to come in and do its part and pass some sort of economic aid package for Americans?

JEFFREY CLEVELAND: Well, Kristin, the Payden & Rygel economics view is actually pretty upbeat. We did see a strong bounce back in Q3. From the data we've looked at so far in Q4, we're still see good momentum in the US economy. We think it's possible for the US economy to grow at an annual rate of 5% to 10% in Q4. So slower than Q3, of course, but still, that would be a stellar pace of growth.

And this is even without additional fiscal aid. And if we're right about that, we'll finish the year, the economy will only be maybe 1% to 2% below pre-COVID levels. And so I think that's very, very important to get back to that stage. And that means we'll probably get to pre-COVID levels, in our view, on GDP by mid-next year, maybe Q2, Q3.

And I think this is really good news. It's much better than most people, even the most optimistic forecasters, expected in June. And so it's a much faster return to pre-COVID levels.

I think that means everything for corporations in terms of corporate profits, but also households. You talked about the unemployment insurance claims, those being still too high. The best way we can get those to come down lower is to have the economy continue to grow over the next couple of quarters, and we think it will.

KRISTIN MYERS: Right. Well, we will continue to be watching that. Jeffrey Cleveland, Payden & Rygel Chief Economist, thanks so much for joining us today.

JEFFREY CLEVELAND: Good to see you.