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Stock market managers expect the consumer to stay strong – should they?

The bulls are convinced that the American consumer – and the stock market – will keep it fine, even if politicians do not approve a new round of fiscal stimulus before the election next month.

However, some economists are in doubt about how much purchasing power consumers have left after a admittedly robust third quarter. Concerned, the latest round of weekly data on unemployment claims showed that first-time benefit claims unexpectedly rose and hit a seven-week high, possibly signaling that the resurgence of COVID-19 in several states is hurting the labor market again.

Read: What puts the nail in the coffin for fiscal stimulus? The calendar maybe

Investors seeking comfort can point to retail sales and readings about consumer confidence, Jeffrey Schulze, investment strategist at ClearBridge Investments, told MarketWatch.

Tire was certainly cheered Friday by data showing retail sales rose 1

.9% in September, well above the 0.7% consensus forecast produced by a Dow Jones Newswires survey of economists. In addition, the initial reading of the University of Michigan’s consumer sentiment index rose to 81.2 this month from 80.4 in September – the highest since March but still well below pre-pandemic levels.

Shares rose after Friday’s data, snapping up a three-day losing streak and allowing the Dow Jones Industrial Average DJIA,
+ 0.39%
and S&P 500 SPX,
+ 0.01%
for each log a third equal weekly gain. The Dow rose 0.1% for the week and closed Friday at 28,606.31, while the S&P 500 saw a weekly increase of 0.2% to close at 3,483.81. Nasdaq Composite COMP,
rose 0.8% for the week to end at 11,671.56.

The continued run of strong sales and rising confidence in the third quarter defied expectations that the consumer would weaken as supplemental weekly unemployment benefits of $ 600 per week ran out in late July.

“Our concern was that spending would fall as the stimulus disappeared and control stopped,” Richard Grasfeder, senior portfolio manager at Boston Private, said in an interview.

Grasfeder said he was surprised by the resilience of U.S. households, noting that consumer spending in August was only 3% lower than in February.

Meanwhile, rising consumer confidence polls, particularly the forward-looking component of the meter, have more in common with mid-to-late stages of an economic recovery than the early part, Schulze said – a development consistent with robust home and car sales.

What keeps it afloat?

Bulls claim that the important consumer is generally in good shape. The robust round of coronavirus help, adopted earlier this year in the depths of pandemic shutdown, helped lift disposable income. It’s not unheard of during a recession, but the scale was particularly impressive, said Schulze, who illustrated the point in a recent note with the chart below:

ClearBridge investments

Meanwhile, the U.S. savings rate rose as the lock on the pandemic threw millions out of work while also shutting down stores and services. After peaking at 33.6%, the rate has fallen but remained at a historically elevated 14.1% in August.

“Consumers, despite the challenges, are in reasonable shape for the financial crisis of 2008. It depends on the individual situation of some people, but from a broad-based perspective that is true,” said Michael Arone, chief investment officer of State Street Global Advisors, in a statement. interview.

Arone cited low fuel prices, cheap borrowing costs along with the aggressive fiscal stimulus package used earlier in the year to boost revenues and savings.

Skeptics claim the data masks an uneven picture and that robust retail sales from September could be one last hurray unless another round of coronavirus help is approved.

Without a new stimulus package, “which now very likely will not be completed this year, disposable income will contract sharply in both the 3rd and 4th quarters,” warned economists Aneta Markowska and Thomas Simons at Jefferies in a note.

The problem, they said, is that while the savings rate is elevated, the excess savings are largely concentrated among high-income households and will not provide a cushion for those who depend on unemployment benefits (see chart below).


Economists at Oxford Economics also forecast a marked decline in consumption in the coming quarters, which ruled out immediate fiscal easing.

“The forthcoming election poses upward and downward risks to the economy, but a drop in income support until 2021 will leave the U.S. consumer quite vulnerable during the fall and early winter,” they wrote (see chart below).

Oxford economy

That said, the weakness could prove to be short-lived.

Markowska and Simons appear to be spending zero growth in the fourth quarter, but they wrote, with a “blue-wave scenario now the basis, probably a more generous fiscal package in January, which is likely to accelerate spending by 2021. The “blue wave” refers to growing expectations among investors and analysts that Democratic challenger Joe Biden will win the November 3 presidential election, with his party retaining control of the House and taking over the Senate.

If Washington fails to come up with an aid package in the first quarter, it would be a potentially damaging “political mistake,” Schulze said. But it is a mistake that is likely to be avoided, he said.

Meanwhile, economic momentum seen in the third quarter goes a long way towards explaining the market’s rise of more than 50% from its lowest pandemic on March 23rd. And that’s why bulls are convinced that any short-term setbacks in the market, such as the retreat that stocks suffered in September, will continue to buy opportunities.

“The gaps between the market and the economy are closed, and unexpectedly, it was the economy that ended up closing this gap,” Schulze said.

The coming week will allow investors to further measure economic momentum as well as a further flow of earnings in the third quarter. House launches in September and building permits are expected Tuesday, while the Federal Reserve’s Beige Book collection of anecdotal economic activity is ready for release on Wednesday.

Thursday brings another round of weekly data on jobless claims and will be followed closely after recent figures showed an unexpected increase.

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