November week 1

In case you missed the most recent Goldman Sachs Weekly Kickstart; the first week of November could be very important for the investment markets.  Everyone is well aware of the election but there are several other macro events that could have a huge impact on the market. 

Here are some excerpts from the report:

Micro for now but first week of November looms. Despite the high

volume of micro news, macro themes continue to impact markets. This

week, China’s interest rate hike and continued public discussion surrounding

Quantitative Easing (QE2) captured attention during the trading day between

pre/post market earnings reports. 3Q earnings will be the focal point next

week. However the balance will tilt heavily towards macro news during the

first week of November when important data releases will provide new

evidence on the trajectory of the US economy.

Monday, November 1: US ISM will reveal the next step in the path of the

business cycle. Consensus expects 54.5. Our US Economics team expects

the ISM will fall below 50 by early 2011. Last month’s slight decline in

headline ISM to 54.4 was about in-line with expectations but a negative New

Orders less Inventories spread implies larger declines in the headline index

over the next few months. We believe a move below 50 this year would

disappoint investor expectations and pose risks to the recent rally.

Tuesday, November 2: US Election Day should provide clues on the nearterm

path for policy. Polling data aggregated by Realclearpolitics.com show

the GOP winning a majority in the House of Representatives and gaining

seats, though remaining short of majority, in the Senate. Polls as of October

22, 2010 show 48 Senate seats safe or leaning Democratic, 44 safe or leaning

Republican, with 8 seats classified as toss-ups. In the 435-seat House where

218 seats are needed for a majority, 215 seats are safe or leaning Republican,

178 seats are safe or leaning Democrat, and 42 seats are considered tossups.

Conversations with investors suggest a split Congressional outcome is

largely expected and would be interpreted constructively because it would

slow what fund managers perceive as a negative policy environment for

business. A Republican Senate majority would be viewed as a positive while

no change in either chamber would be viewed negatively and provide

incremental risks around that central case. Investors want the first order of

business in the lame-duck session to be clarification of the tax law. Stocks

will likely respond positively if the existing rates are extended for all, or at

least for those with income below a certain threshold. We continue to

recommend our Dividend Growth basket (Bloomberg ticker <GSTHDIVG>).

Wednesday, November 3: FOMC will likely announce a second round of

quantitative easing (the so-called “QE2”), but how much and at what pace?

Our US Economics team expects $1 trillion of QE2 that could add about 1/2

percentage point to US real GDP growth. Investors generally share that view

and have coalesced around an announcement of at least $500 billion of

security purchases following the FOMC meeting. In addition, the consensus

view is for statements that more easing will be taken as needed. We expect

QE to be positive for equity markets and other risk assets but estimate the

market has already priced in $500 billion to $1 trillion of easing. Our analysis

also suggests that $100 billion per month of QE2 and $7.5 billion of AMG

mutual fund flows have similar impact on equities. That relationship is vital

as portfolio reallocation towards US equities would be very bullish for the

S&P 500.

Friday, November 5: Employment report. Consensus expects employment

growth of 63,000 (private payroll gain of 89,000) and an unemployment rate

of 9.6%, flat versus last month. Our US Economics team forecasts the

unemployment rate will rise to 10% by 2Q 2010. Our US Economics team

does not expect a double-dip recession, although it assigns a 25%-30%

probability of such an outcome. Non-farm payrolls and the ISM are the two

most relevant data points in our economists’ US-MAP score. S&P 500

monthly performance has tracked macro surprises relative to consensus

expectations more closely since 2008 so the payroll report will be a key to

both the economic outlook and the near-term trading pattern.