While stocks continue to consolidate the significant gains made since the March low, we remain encouraged by the unfolding economic recovery.

Key takeaway: We are seeing a moderation in economic readings.

We are seeing moderation in the incoming economic readings, but this is after the massive snapback in activity after the pandemic-induced lockdown. We view this as movement toward a more sustainable recovery path, rather than renewed weakness.

Despite delays in passing a new U.S. fiscal stimulus package, we continue to expect a deal to be reached in the coming weeks that will provide further support for those hardest hit by the pandemic. Meanwhile, the Federal Reserve reinforced its commitment to support the economy last week by releasing projections that show no increase in interest rates over the next three years. This suggests a high bar for future interest rate increases, which should help support stocks and other risk assets, in addition to the economy (through low mortgage and corporate borrowing rates).

U.S. Economic Data Remains Encouraging, Despite Moderation: While the incoming economic data has moderated from the historically strong readings registered early in the reopening process, it remains consistent with a strong recovery.

Consumption accounts for two-thirds of U.S. GDP (economic output). Consequently, consumer spending is a closely watched, economically important data release. Despite coming in below expectations, retail sales rose 0.6% in August, after already recovering the pre-pandemic level in July. The increase last month was stronger than the average August gain since 1992. It was also stronger than the average monthly change in the 12 months prior to the start of the recession, suggesting better-than-typical sales growth. This suggests that consumer spending continues to support the ongoing economic recovery.

While housing starts and permits saw their first decline in four months, homebuilder confidence rose for the fifth straight month, to a record high level. This surge in confidence is consistent with further housing gains in the coming months.

Indeed, after last week’s retail sales and housing data, the Atlanta Federal Reserve’s GDPNow estimate for third quarter 2020 GDP growth was revised up to an unprecedented 32% - a significant recovery from the second quarter’s lockdown-induced collapse.

Consumer sentiment continues to move higher with the September University of Michigan Consumer Sentiment Index coming in above expectations and to the highest reading since March. Both current conditions and consumer expectations strengthened. The manufacturing recovery remains on track with August’s industrial production report showing manufacturing output increasing for the fourth straight month.

We are also encouraged by the recent positive performance of the deep-cyclical industrial and material stocks, which is consistent with the improving global manufacturing conditions that we are seeing.

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