Let’s start with the status of the labor market:
U6 (in red) is 12.8%. Its highest level during the last recession was 17.2%. U3 (the traditionally reported unemployment rate) is 7.9%; its highest level during the last recession was 9.9%. While these numbers have quickly improved, it’s likely that the rate of improvement will slow:
While the economy has regained about half of its job losses (left), the pace of establishment job growth is slowing (right).
Today, the BEA released the latest personal income and spending data:
Personal income increased $170.3 billion (0.9 percent) in September according to estimates released today by the Bureau of Economic Analysis (tables 3 and 5). Disposable personal income (DPI) increased $150.3 billion (0.9 percent) and personal consumption expenditures (PCE) increased $201.4 billion (1.4 percent).
Real DPI increased 0.7 percent in September and Real PCE increased 1.2 percent (tables 5 and 7). The PCE price index increased 0.2 percent (table 9). Excluding food and energy, the PCE price index increased 0.2 percent.
Here’s a chart of the data:
The growth in M/M data has returned to a more normal or standard rate of growth.
Retail sales data has returned to pre-lockdown levels:
The left chart shows the absolute values; the right chart shows the Y/Y percentage change.
…consumer sentiment is still weak.
Fundamental backdrop: overall, the consumer picture is positive. There’s been solid job growth which has supported a strong uptick in consumer spending. The main problem going forward is that job growth is likely to slow, which will keep unemployment high while potentially denting wage gains.
Despite the good fundamentals, the two primary consumer-focused ETFs are correcting:
The XLP formed a double-top in early September and mid-October. Momentum is declining and prices are moving lower. Right now, the likely price target is the 200-day EMA.
The XLY is also in a correction. Momentum is declining and prices are below the 10-, 20-, and 50-day EMA. The right panel shows that the selling has accelerated this week; prices gapped lower on Wednesday AM and have printed two solid down candles since.
My central market thesis for the fourth quarter is that it will be a very difficult quarter. Most of the easy economic gains are over. And with no additional fiscal stimulus on the horizon, growth will probably slow. The main problem, however, is the large increase in virus cases, which will only escalate during the next few months. This will likely lead to additional lockdowns, quarantines, and partial shutdowns, all of which will lower growth.
Stay on the sidelines for now.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.