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Stock market bulls are counting on consumers to stay strong, right?

The bulls are convinced that the American consumer – and the stock market – will hold up well, even if politicians fail to pass another round of fiscal stimulus before next month’s election.

Some economists, however, have doubts about how much purchasing power consumers have left after a very robust third quarter. Worryingly, the latest round of weekly data on jobless claims showed that early claims increased unexpectedly, reaching a high of seven weeks and possibly signaling that recurring COVID-19 outbreaks in several states are damaging the labor market again.

To read: What will put the nail in the coffin of the fiscal stimulus? Maybe the calendar

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

The bulls were certainly encouraged on Friday by data which showed September retail sales rose 1

.9%, far exceeding the 0.7% consensus forecast produced by a poll of Dow Jones economists. Newswires. Furthermore, the preliminary reading of the University of Michigan Consumer Confidence Index rose to 81.2 this month from 80.4 in September, the highest since March although still well below pre-pandemic levels.

Shares rose after Friday’s data, triggering a three-day losing streak and allowing for the Dow Jones Industrial Average
+ 0.39%

and the S&P 500
+ 0.01%

a third consecutive weekly earnings for each register. The Dow was up 0.1% for the week, ending Friday at 28,606.31, while the S&P 500 saw a weekly rise of 0.2% to close at 3,483.81. The Nasdaq Composite

it rose 0.8% by the end of the week to 11,671.56.

The continued run of strong sales and rising confidence in the third quarter challenged expectations that consumers would falter due to the expiration of the additional $ 600-a-week weekly unemployment benefit at the end of July.

“Our concern was that consumer spending would decline as the stimulus faded and controls broke,” Richard Grasfeder, senior portfolio manager at Boston Private, said in an interview.

Grasfeder said he was surprised by the resilience of American households, noting that consumer spending in August fell only 3% from February levels.

Meanwhile, rising consumer confidence readings, particularly the forward-looking component of the indicator, have more in common with the mid-to-late stages of an economic recovery than the first part, Schulze said, a development that is in line with the house and the robust car the sales

What keeps it afloat?

The bulls argue that the most important consumer is, in general, in good shape. The robust coronavirus aid cycle enacted earlier this year during the depths of the pandemic blockade has helped boost disposable income. This isn’t unheard of during a recession, but the scope has been particularly impressive, said Schulze, who illustrated the point in a recent note with the chart below:

ClearBridge Investments

Meanwhile, the US savings rate has skyrocketed as the pandemic freeze has thrown millions of people out of work, even closing shops and services. After reaching a peak of 33.6%, the rate fell but remained at a historically high 14.1% in August.

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

Arone cited low fuel prices, cheap borrowing costs along with the aggressive fiscal stimulus package implemented earlier this year to support incomes and savings.

Skeptics argue that the data hides an uneven picture and that solid September retail sales data could be the last hurray unless another round of coronavirus aid is approved.

Without another stimulus package, “which is now very unlikely to be finalized this year, disposable income will contract sharply in both the third and fourth quarters,” Jefferies economists Aneta Markowska and Thomas Simons warned in a statement. .

The problem, they said, is that while the savings rate is high, excess savings are largely concentrated among high-income families and won’t provide a cushion for those who rely on unemployment benefits (see graph below). .


Economists at Oxford Economics were also planning a significant drop in consumption in the next few quarters, barring an immediate tax relief.

“The upcoming elections carry upside and downside risks to the economy, but a decline in income support through 2021 would leave the US consumer quite exposed during the fall and early winter,” they wrote (see graph under).

Oxford Economics

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

Markowska and Simons seek consumer spending to show zero growth in the fourth quarter, but, they wrote, with a “blue wave scenario now the base case, a more generous fiscal package is likely in January, which is likely to accelerate business. spending in 2021 “. The “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 taking over the Senate.

Washington’s failure to come up with an aid package within the first quarter would be a potentially damaging “political mistake,” Schulze said. But it’s a mistake that will likely be avoided, he said.

Meanwhile, the economic momentum seen in the third quarter is very helpful in explaining the more than 50% increase in the market since its March 23 pandemic low. And that is why the bulls are confident that any short-term market setback, such as the retreat that stocks suffered in September, will remain buying opportunities.

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

The coming week will give investors the opportunity to further assess the economic momentum, as well as a further deluge of third quarter earnings. Housing starts in September and building permits are due on Tuesday, while the Federal Reserve’s Beige Book on Anecdotal Economic Activity is scheduled for release on Wednesday.

Thursday will bring another round of weekly jobless claims data and will be closely followed after the latest figures showed an unexpected increase.

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