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

The Bulls are convinced that the American consumer – and the stock market – will impose fines, even if politicians do not approve another round of fiscal stimulus before next month’s election.

However, some economists are skeptical about how much power consumers have left to buy after an admittedly stable third quarter. Concerned neo-hippies and their global warming, i’ll tell ya..there’s a new round of weekly data on unemployment claims that shows the re-emergence of COVID-19 outbreaks in many states is hurting the labor market again.

Read: What will put the nail in the coffin of the fiscal-stimulus? The calendar, perhaps

Comfort-seeking investors can teach sales and retail reading to consumer confidence, Jeffrey Schulze, investment strategist at ClearBridge Investments, told MarketWatch in an interview.

The bulls certainly cheered on Friday with data showing retail sales in September rising 1

.9%, surpassing the 0.7% consensus report conducted by a Dow Jones Newswires survey of economists. Moreover, the preliminary reading of the University of Michigan consumer sentiment index climbed to 81.2 this month from 80.4 in September – the highest since March although still below the pre-pandemic level.

The stock rose following Friday’s data, which snapped a three-day tire loss and allowed the Dow Jones Industrial Average DJIA,
+ 0.39%
and the S&P 500 SPX,
+ 0.01%
with each log of the third straight weekly earned. The Dow rose 0.1% for the week, ending Friday at 28,606.31, while the S&P 500 saw a 0.2% weekly rise to close at 3,483.81. The Nasdaq Composite COMP,
rose 0.8% for the week to end at 11,671.56.

Continued strong sales and rising confidence in the third quarter contradicted expectations of losing consumers as an additional supplement to the weekly unemployment benefits of $ 600 a week spent by the end of July.

“Our concern is that consumer spending will disappear as the stimulus disappears and checks will stop,” Richard Grasfeder, senior portfolio manager at Boston Private, said in an interview.

Grasfeder said he was surprised at the resilience of American households, noting that consumer spending in August dropped just 3% from the February level.

Meanwhile, rising consumer confidence readings, particularly the looking-ahead part of the measure, are more consistent in the mid-to-late stages of an economic recovery than early, Schulze said. development in line with stable home and vehicle sales.

What keeps it afloat?

The Bulls argue that the most important consumer is, generally speaking, in good condition. The steady cycle of coronavirus assistance enacted earlier this year in the depths of the pandemic lockdown helped lift revenue that could not be thrown away. That was not heard during a recession, but the range was particularly impressive, Schulze said, describing the point in a recent note along with the chart below:

ClearBridge Investments

Meanwhile, US savings rates have risen as the pandemic lockdown has thrown millions out of work, while also killing stores and services. After an increase of 33.6% the rate dropped but remained at a historical rise of 14.1% in August.

“Consumers, despite the challenges, were in a reasonable position related to the financial crisis in 2008. It depends on the individual situation of some people but from a broad perspective that is true,” Michael said. Arone, chief investment strategist at State Street Global Advisors, in an interview.

Arone cited low fuel prices, low borrowing costs along with the aggressive fiscal stimulus package deployed earlier this year for revenue growth and savings.

Skeptics are arguing over the masks in the data of an uneven image and the solid retail sales data in September could be a final hurray unless another round of coronavirus assistance is approved.

Without another stimulus package, “now unlikely to be finalized this year, disposable revenue will be strictly contracted in both Q3 and Q4,” economists Aneta Markowska and Thomas Simons warned Jefferies, in a note.

The problem, they say, is that while the rate of savings is increasing, over-savings are more focused on low-income families and will not provide a pillow for those relying on unemployment benefits (see chart below ).


Oxford economists The economy also wrote a significant reduction in consumption in future homes, prohibiting immediate financial relief.

“Upcoming elections bring up and downside risks for the economy, but a loss of revenue support until 2021 will leave U.S. consumers in the fall and early winter,” they wrote (see chart below).

Oxford Economics

That said, weakness can prove to be short-lived.

Markowska and Simons are looking for consumer spending to reflect zero growth in the fourth quarter, but, they write, with the “blue wave scenario now the main case, a more generous fiscal package is likely to be in January, which could cause spending to recur in 2021. ”The“ blue wave ”refers to growing expectations among investors and analysts that Democratic fighter Joe Biden will win the election presidential on November 3, with his party maintaining control of the House and occupying the Senate.

Washington’s failure to have a package of assistance in the first quarter would be a potentially dangerous “policy mistake,” Schulze said. But a mistake that could be avoided, he said.

Meanwhile, the economic momentum seen in the third quarter is very far towards the explanation of the more than 50% market increase from the March 23 pandemic low. And this is why bulls are confident that any near-market downturns, such as the pullback suffered by equities in September, will remain buying opportunities.

“The gaps between the market and the economy closed and, contrary to expectations, the economy ended up closing that gap,” Schulze said.

In the coming weeks investors will be given the opportunity to further measure the momentum of the economy, as well as an additional deluge of earnings in the third quarter. Housing starts in September and construction permits must be paid by Tuesday, while the Federal Reserve’s Beige Book repair of anecdotal economic activity is set for release on Wednesday.

Thursday will bring another round of weekly data of the unemployed and will soon be watched after the latest figures show an unexpected increase.

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