U.S. consumer spending slips as COVID-19 cases skyrocket

On the latest edition of Market Week in Review, Quantitative Investment Strategist Dr. Kara Ng and Julie Zhang, director, North America sales enablement, discussed the latest progress toward a U.S. stimulus package. They also highlighted recent global economic data releases and revealed their top investment theme for 2021.

U.S. retail sales fall, jobless claims rise as Congress readies relief bill

As of mid-morning Pacific time on 18 December, U.S. lawmakers were finalising a deal on an approximately $900 billion coronavirus relief package, Ng said. The package is likely to contain renewed federal unemployment insurance benefits of $300 per week, in addition to stimulus checks of approximately $600 for individuals, she noted. Additional funds for schools, transportation, COVID-19 vaccine distribution and small businesses are also likely to be included, Ng added.

The proposed bill does not feature additional aid for state and local governments, or COVID-19-related liability protections for businesses - both of which had become major sticking points between Democrats and Republicans, she said, adding that these issues appear to have been set aside for now. “While negotiations around this rescue package could continue for a few more days, the ultimate takeaway is that Congress is close to reaching an agreement - and that’s great news,” Ng remarked.

Weaker economic data released over the past few weeks has underscored the need for additional fiscal stimulus, she said, pointing to U.S. retail sales, which fell by 1.1% in November. “The consumer is the backbone of the U.S. economy, and this decline signals that the consumer may need more support,” Ng stated. The resurgence of COVID-19 infections across the U.S. this fall, coupled with an increase in government-mandated lockdown measures, are some of the likely culprits behind the dip in spending, she added.

In addition, while the nation’s labour market has recovered over half of the 22 million jobs lost during March and April, the pace of recovery has slowed recently, as evidenced by November’s weaker-than-expected jobs report, Ng noted. Initial U.S. unemployment claims for the week ending 12 December also reached the highest level in three months, she added, with 885,000 Americans filing for new jobless benefits.

With many earlier stimulus measures from March’s CARES Act set to expire at the end of the month, Congress is cutting it close as it nears approval on a relief bill, Ng said, noting that the weak data probably motivated lawmakers to speed up their efforts. “Ultimately, continued fiscal and monetary support will be key to building a bridge for households and businesses to stay afloat until vaccines are widely available,” she concluded.

December PMIs point to resilience in manufacturing sector

Broadening her gaze to the health of the global economy, Ng said that the world is in the early stages of a post-recession recovery. With effective COVID-19 vaccines on the way, she and the team of Russell Investments strategists remain quite positive on the business cycle outlook over the medium-term.

In the short-term, however, Ng said that an important watchpoint is whether any of the slowdowns in growth devolve into structural economic damage. “At this point, there’s little evidence of this,” she stated, noting that the economy seems to have absorbed subsequent waves of COVID-19 infections better than earlier in the year.

This is evidenced by recent flash PMI (purchasing managers’ index) surveys from December for the U.S., Europe, the UK and Japan, Ng noted. The reports show that manufacturing remains resilient, she said, while contractions in the UK and European services sectors are notably much less severe than in the spring. In addition, while the preliminary December PMI for the U.S. services sector came in below consensus expectations, Ng noted that the number was fresh off the heels of a very high reading in November, and still indicates growth in the sector.

“All in all, despite some near-term economic risks, our medium-term outlook is still favourable for risk assets,” she stated.

Our top investment watchpoint for 2021, plus Kara’s wish for Santa

With the year winding to a close, Zhang asked Ng if she had any particular 2021 requests for Santa. “Of course. Above all else, I would ask Mr. Claus for a strong post-vaccine recovery,” she stated, noting that such a rebound is likely to be especially beneficial to the industries devastated most by the pandemic.

Ng said that a strong recovery will also likely benefit more cyclical assets, such as small-cap stocks, value stocks and non-U.S. developed-market equities, as the focus shifts from a stay-at-home trade narrative to a reopening trade narrative. “We’ve already seen this rotation start, in the wake of the successful vaccine announcements last month,” she noted, adding that this is likely to be the top investment theme for 2021.

With that, Ng and Zhang wrapped up the final 2020 edition of Market Week in Review by wishing viewers a safe and healthy holiday season—and a happy new year.

Editor’s note: Market Week in Review will resume on 8 January 2021.

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Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.