Bulls are confident that the American consumer – and the stock market – will hold up well, even if politicians fail to approve another round of fiscal stimulus before next month’s election.
However, some economists doubt how much consumer power consumers have left after a recognized strong third quarter. Of concern, the latest cycle of weekly data on unemployment claims showed that, for the first time, claims for benefits rose unexpectedly to a 7-week high, possibly signaling that recurrent COVID-19 outbreaks are recurring in some states. harm to the labor market.
Read: What will the nail put in the fiscal-stimulating coffin? Calendar, maybe
Investors looking for comfort can point to retail sales and consumer confidence, said Jeffrey Schulze, investment strategist at ClearBridge Investments, in an interview with MarketWatch.
The bulls were certainly encouraged by data showing that retail sales rose 1.9% in September, well above the consensus forecast of 0.7% in a survey conducted by Dow Jones Newswires economists. In addition, a previous reading of the University of Michigan’s consumer sentiment index rose to 81.2 this month from 80.4 in September, the highest level since March, although still well below the pre-pandemic level.
Shares rose on Friday, breaking a three-day losing streak and allowing the Dow Jones Industrial Average DJIA,
and S&P 500 SPX,
for each magazine the third consecutive weekly increase. The Dow rose 0.1% for the week to 28,606.31 on Friday, while the S&P 500 rose 0.2% weekly to close at 3,483.81. Nasdaq Composite COMP,
increased by 0.8% for the week, ending at 11,671.56.
Continued strong sales and growing confidence in the third quarter did not give hope that the consumer will fall, as additional weekly unemployment benefits of $ 600 per week ended in late July.
“Our concern was that consumer spending would fall as the stimulus disappeared and inspections would cease,” said Richard Grassfedder, senior portfolio manager at Boston Private, in an interview.
Grassfeder said he was surprised by the resilience of American households, noting that consumer spending fell by only 3% in August.
Meanwhile, growing consumer confidence, especially the promising component of the sensor, has more to do with the mid-to-late stages of economic recovery than the early part, Schulze said, an event that corresponds to reliable homes and car sales.
What keeps him afloat?
Bulls claim that the most important consumer, in general, is in good shape. A powerful round of coronavirus relief, launched earlier this year in the depths of the pandemic blockade, has helped raise existing revenues. This was not unheard of during the recession, but the scale was particularly impressive, said Schulze, who illustrated this in a recent note on the chart below:
Meanwhile, the level of US savings soared when the pandemic blockade took millions out of business and closed shops and services. After reaching a peak of 33.6%, the rate decreased, but in August remained at 14.1%, which was historically.
“Despite the challenges, consumers are in reasonable shape about the 2008 financial crisis. It depends on the individual situation of some people, but from a broad point of view it is true, “said Michael Arone, chief investment strategist at State Street Global Advisors, in an interview.
Arone called low fuel prices, cheap borrowing costs, and an aggressive fiscal stimulus package launched earlier this year to boost revenues and save.
Skeptics believe that the data masks the unevenness, and that reliable September retail data could be the last resort if the next round of coronavirus relief is not approved.
Without another stimulus package, “which is now unlikely to be completed this year, disposable income will fall sharply in both the third and fourth quarters,” warn economists Aneta Markovska and Thomas Simons of Jefferies.
The problem, they say, is that, although savings are high, excess savings are largely concentrated among high-income households and will not provide a cushion for those who rely on unemployment benefits (see chart below).
Oxford Economics economists also focused on a significant drop in consumption in the coming quarters, preventing immediate financial relief.
“The upcoming election will bring the economy up and down, but the income support period until 2021 will make US consumers more exposed in the fall and early winter,” they wrote (see chart below).
However, the weakness may be short-lived.
Markovskaya and Simons expect consumer spending to show zero growth in the fourth quarter, but they say the blue-wave scenario, which is now the baseline, is likely to be a more generous fiscal package in January, which is likely to be will accelerate spending in 2021. ”The“ blue wave ”refers to growing expectations from investors and analysts that Democratic candidate Joe Biden will win the presidential election on November 3, when his party retains control of the House and takes the Senate.
If Washington does not prepare an aid package by the first quarter, it would be a potentially harmful “political mistake,” Schulze said. But this is a mistake that may be avoided, he said.
Meanwhile, the economic momentum observed in the third quarter significantly explains the growth of the market by more than 50% from its pandemic low on March 23. And so the bulls are confident that any short-term market failures, such as the rollback that the stock experienced in September, will remain opportunities to buy.
“The gaps between the market and the economy have narrowed, and, contrary to expectations, it is this economy that has finally filled this gap,” Schulze said.
The week ahead will give investors the opportunity to further assess the economic momentum, as well as the subsequent flood of profits in the third quarter. Housing construction begins in September, and building permits are due on Tuesday, while a collection of anecdotal economic activities of the US Federal Reserve is released on Wednesday.
Thursday will bring another cycle of weekly data on unemployment claims, and it will be closely monitored after the latest data showed an unexpected increase.