$3 Trillion Up in Smoke After Election

Stock Selloff Erases $3 Trillion

On Thursday, the stock market lost $3 trillion in one day. $2.5 trillion of that was from Nasdaq. That is a trillion with a T, not a billion or a million. It is hard to fathom the sheer size of the loss in value.

The Nasdaq fell 5.5%, the S&P 500 lost 3.8%, and the Dow dropped more than 1,500 points. The worst damage was in chips, where the Philadelphia Semiconductor Index fell as much as 11%, and names like AMD and Micron lost roughly 15% in a single session.

AI Financing Concerns Crack the Foundation

This didn’t come out of nowhere. The AI trade has been under pressure for two weeks, since Alphabet and Amazon both reported negative free cash flow, Intel provided lower guidance, and credit markets began questioning how much debt the data center buildouts are carrying. The foundation was already cracked.

Election Results Compound AI’s Problems

What appears to have broken it was the election. This was election week, and, as many betting sites predicted, the Democratic Party regained control of both houses of Congress. Markets initially cheered, with Wednesday delivering the best post-midterm stock rally in 44 years.

By Thursday, the mood had reversed completely as investors worked through what the down-ballot results meant for AI. Voters passed dozens of local ballot measures aimed at slowing data center construction, with Ohio a notable example. Texas, which Wells Fargo estimates holds about 27% of all planned data center capacity, elected a Democratic governor. Suddenly, the AI buildout had a political problem stacked on top of a financing problem.

Freddie Mac Survey: Rates Decline Again

All that money leaving AI and tech stocks had to go somewhere, and much of it found its way to the more secure bond/interest rate market. That made this a great week for mortgage rates, with Freddie Mac’s survey falling to 7.18%, a third straight weekly decline.

Rate markets had a second and completely separate reason to like the result. A divided government cannot easily increase or decrease spending, and investors and businesses like predictability. They want to be able to plan for the future and know what will happen. The more stability the government has, the better for them.

What makes this rate improvement even more incredible is that it continued after a week of positive economic news that would ordinarily send rates shooting up.

JOLTS: Openings Rise Above Expectations

JOLTS (Job Openings and Labor Turnover) came out for September. It showed a rise of 333,000 job openings to 7.52 million, much stronger than expectations of 7.1 million. The hiring rate was reported at 3.4%, up one-tenth of a percentage point from the prior month.

The quits rate rose from 1.9% to 2.1%, moving it off the lowest level since 2014, excluding COVID. It is still low, but it may be a step in the right direction.

ADP Employment Report: Growth Beats Expectations

ADP released its October private payroll Employment Report. It showed 86,000 jobs were created, stronger than the 69,000 expected. Most of the growth came from Trade/Transportation/Utilities at 39,000, with Education/Health Services adding 28,000.

That is a change from the pattern we have tracked all year, where Education/Health carried nearly everything. Professional/Business Services lost 27,000 jobs, the third month in a row of losses, likely due to AI.

Revelio Employment Report: Weak Job Growth

Revelio Labs released its employment report for October. It showed only 26,000 jobs, a very weak number. Historically, Revelio correlates well with the BLS Jobs Report. This month, it definitely didn’t!

BLS Jobs Report: Strong Numbers, Questions

The big report for the week was the Bureau of Labor Statistics (BLS) Jobs Report for October that came out on Friday. Markets were expecting 60,000–65,000 jobs, but they got 165,000. In addition, the prior two months were revised higher by 84,000.

Do we trust this? Again, we need to dive a little deeper to see what is going on. First, ADP and Revelio were significantly lower. As an example, the BLS showed Professional and Business Services adding 70,000 jobs compared to ADP’s loss of 27,000 jobs.

Remember, the BLS uses something called the Birth/Death model to estimate jobs created and lost by small businesses opening and closing. This month, that model showed 412,000 jobs being created. This gets applied to the non-seasonally adjusted numbers. Historically, there have been large negative revisions because of defects in this model. We will see if that trend continues.

Household Survey: Underemployment Rises Despite Improvement

The Household Survey component of the Jobs Report showed the unemployment rate falling from 4.2% to 4.1%. On an unrounded basis, it went from 4.18% to 4.14%, not a large change. Inside the report, it showed job creation of 463,000, and at the same time, the labor force increased by 421,000.

The number of workers who were working part-time for economic reasons (because they can’t get full-time work or need additional income) rose by 339,000. That isn’t a sign of a great economy.

These workers are counted as employed in the 4.1% unemployment rate, called the U-3, which makes their struggle invisible there. They do show up in the U-6 rate, which adds underemployed and discouraged workers to the unemployed. That rate rose from 7.6% to 7.9% and is generally accepted to be a more accurate unemployment rate.

Looking Ahead: Inflation Takes Center Stage

It is already inflation week next week:

• Tuesday, November 10: ADP Weekly, Consumer Price Index (CPI), 10-year auction
• Wednesday, November 11: Veterans Day; bond markets are closed (stock markets are open)
• Thursday, November 12: Jobless Claims, 30-year auction, Existing Home Sales
• Friday, November 13: Producer Price Index (PPI)