Stock-market bulls are relying on the consumer staying strong – do they need to?



The Bulls are confident for the American consumer – and the stock market – well, even as politicians fail to approve another round of fiscal stimulus ahead of next month’s elections.

However, some economists are skeptical about how strong consumer purchases have left since the third quarter. Concerningly, the latest round of weekly data on jobless claims showed that applications for benefits rose unexpectedly for the first time, a seven-week high and possibly indicating a resurgence of COVID-19 in many states The outbreak is again hurting the labor market.

Read: What will put the nail in the fiscal-stimulus coffin? Calendar, maybe

Investors looking for comfort may point to readings on retail sales and consumer confidence, investment strategist Jeffrey Schulz of Clearbridge Investments told Marketwatch in an interview.

The bulls were certainly happy on Friday, recording a 1.9% increase in retail sales in September, far surpassing the 0.7% consensus forecast produced by the Dow Jones New York survey of economists. On top of this, preliminary readings of the University of Michigan’s Consumer Sentiment Index rose to 81.2 from 80.4 in September this month – the highest since March though still below pre-epidemic levels.

Stocks rose after Friday’s data, a three-day decline in Streak and the Dow Jones Industrial Average DJIA allowed,
+ 0.39%
And the S&P 500 SPX,
+ 0.01%
Enter weekly benefits every third straight. The Dow climbed 0.1% for the week to close at 28,606.31 on Friday, while the S&P 500 gained 0.2% weekly to close at 3,483.81. Nasdaq Composite Comp,
-0.36%
The week ended up 0.8% at 11,671.56.

Stronger sales and increased confidence in the third quarter have led to a drop in consumer expectations as a supplemental weekly unemployment benefit of $ 600 a week will occur in late July.

“Our concern was that consumer spending was going to come down and the excitement went away and checks stopped,” Richard Grossfeder, senior portfolio manager at Boston Private, said in an interview.

Grassfeder said he was surprised by the resilience of American households, with consumer spending in August only 3% below February levels.

Meanwhile, rising consumer confidence readings, especially the forward-looking component of the gauge, have more in common with the mid-to-late stages of economic recovery than the initial part, Schulz said – a development that strengthens home and auto Is keeping in mind. Sale.

What is it to preserve?

Bulls argues that all important consumers are, generally speaking, in good shape. Stronger rounds of coronovirus assistance earlier this year during the depth of the epidemic lockdown helped to increase disposable income. This is not unheard of during the recession, but the scope was particularly impressive, said Schulz, who depicted the point in a recent note with the chart below:

ClearBridge Investments

Meanwhile, the rate of American savings rose so much that the epidemic lockout led to the closure of shops and services, as well as millions of people being fired. The rate has declined in August after growing at a rate of 33.6% but a historical increase of 14.1% in August.

“Consumers, despite the challenges, are in reasonable shape relative to the 2008 financial crisis. It depends on the personal situation of some people, but it is true from a broad-based perspective, ”said Michael Aron, chief investment strategist at State Street Global Advisors.

Aron cited lower fuel prices, raising the cost of cheap debt with an aggressive fiscal stimulus package earlier this year to boost income and savings.

Skeptics consider the data mask to be an uneven picture and strong September retail sales data could be one last storm until another round of coronovirus assistance is approved.

Without another stimulus package, “which is no longer likely to be finalized this year, disposable income will contract sharply in both Q3 and Q4,” economists Anita Markowska and Thomas Simmons warn in a note in Jefferies.

The problem, he said, is that when the savings rate is raised, the additional savings are largely concentrated in high-income households and will not provide a cushion for those dependent on unemployment benefits (see chart below).

Jefferies

Economists at Oxford Economics were also pointing to a steep decline in consumption in the coming quarters, providing immediate financial relief.

“The upcoming election bears upside and downside risks to the economy, but a decline in income support by 2021 will significantly expose the American consumer during the fall and early winter,” he wrote (see chart below).

Oxford economics

Having said that, the weakness may prove to be short-lived.

Markowska and Simmons seek consumer spending to show zero growth in the fourth quarter, but they wrote, “Now the base case with the blue-wave scenario, a more generous fiscal package is expected in January, with a possible recovery. Will be the reason for the expense. ” In 2021. “” Blue Wave “refers to rising expectations among investors and analysts that Democratic challenger Joe Biden will win the presidential election on November 3, with his party retaining control of the House and occupying the Senate.

Failure by Washington to come up with an aid package by the first quarter would be a potentially damaging “policy mistake”, Schulze said. But it is a mistake that will likely be avoided, he said.

Meanwhile, the economic momentum seen in the third quarter goes a long way towards clarifying the market’s more than 50% growth from the March 23 pandemic. And this is the reason why the bull is confident that any time period that comes to market at the end of September, such as a pullback, equity will decline.

“The gap between the market and the economy has closed and against expectations, it was the economy that was closing that gap,” Schezs said.

The coming week will give investors a chance to boost the economic momentum further, as well as further increase the third quarter earnings. September housing starts and construction permits are due on Tuesday, while the Federal Reserve’s compilation of the Beige Book’s economic activity is scheduled for release on Wednesday.

On Thursday, another round of weekly jobless claims data will come and it will be closely watched after the latest figures have unexpectedly increased.

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