Morning Notes — Encouraging Sector Leadership

Fiscal stimulus: Last week, many economists finally removed near-term fiscal stimulus from their Q4 GDP growth estimates.   The estimated $1T-$1.5T fiscal package would have been 5 of GDP, which is a very big number and you’d think removing something that large would create a massive change to the forecast.  But the aggregate annualized Q4 GDP number only fell from ~3.5% growth to ~2% growth for two reasons: 1) stronger than expected consumer goods spending, business investment and residential investment since the middle of the year and; 2) a record high ~18% US household savings rate at the end of July. Essentially, there’s still a lot of fuel to burn from the Cares Act.  The pre-pandemic US household savings rate was already quite high at 7-8% and returning to that level would generate a ~3% increase in consumer spending to an annualized ~7% rate.  And while it’s no longer in estimates, consensus probably still expects additional fiscal stimulus before year end.  

Next: This week brings a number of US economic reports important to the fiscal stimulus discussion: 1) consumer confidence for September with consensus looking for 89.4 vs the prior 84.80; 2) manufacturing PMI with consensus looking for an unchanged 53.5 month-over-month; 3) ISM manufacturing of 56.4 vs the prior month at 56.3 and; 4) September Jobs Report with consensus looking for payroll adds of 850,000 vs 1.371M last month and an Unemployment Rate of 8.2% vs 8.4% in August.  The CQ3 earnings season that begins the week of 10/12 should also inform markets on the role of fiscal stimulus going into 2021.    

Fundamental: Record Q3 corporate debt issuance resulted in significant increases in cash balances that can be used to fund M&A in Q4.  Look for M&A activity to pick up from here. 

Technical: We’ve been looking for the S&P 500 (SPX) to hold ~3220 since the pullback began on 9/3.  On Friday, we flagged two technical developments that have made us near-term cautious including: 1) a series of afternoon fades where the S&P 500 (SPX) was unable to hold onto intraday gains and; 2) the relative underperformance in cyclical/value sectors.  Last week, the SPX appeared to be losing the required near-term momentum to push through former support levels (now resistance) at ~3350.  Today’s cyclical/value leadership is encouraging, but a firmer close is necessary plus some follow through above ~3350. Again, a break below ~3200 wouldn’t signal the beginning of a bear market, but would open a technical window for another ~6% downside to 2975-3025.