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Stock Rally Was Cautious Friday: What Wall Street's Saying

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Stocks rose Friday after a strong retail sales report for September, but the outperforming sectors were mostly the defensive ones, less so cyclicals.

The S&P 500 started the day up 0.5% but finished up just 0.01%, as non-tech stocks rose, but big tech fell. The Nasdaq fell 0.36%. The 10-Year-Treasury yield rose a tock to 0.74%, but is down on the week from a starting point of 0.77%. Yields and prices move in opposite directions.

This week, The S&P 500 is up less than 1%, with the defensive large cap consumer staples group up about 0.7%. And large cap growth stocks, less sensitive to changes in the economy than cyclical value stocks are, rose 0.9%. Value was essentially flat.

Friday wasn’t much different. Consumer discretionary stocks fell a few tenths of a percentage point on the day and while staples were as well, the defensive NYSE Healthcare Index rose 1.15%, with United Health  (UNH)  up 1.69%. The Dow Utilities index rose 1%. The highly cyclical banking and oil sectors were flat.

Positively, retail sales for September rose 1.9% against varying reported estimates of around 1%. This points to the continued strength of the consumer’s recovery, as households have saved cash and benefited from benefits and government checks. Still, some on Wall Street note that the sectors that benefited most from that spend were not the struggling and economically-sensitive ones. Also, with no fiscal stimulus, total spending could decelerate soon as small businesses, unable to fully reopen, may lay employees off again.

Investors are worried about the speed of the economic recovery and positioning defensively.

Here’s what Wall Street’s saying:

Charlie Ripley, Senior Investment Strategist , Allianz Investment Management:

"After slowing briefly late in the summer, retail sales surprisingly increased by 1.9% and was fueled by apparel, auto, and gas station sales. Despite unemployment benefits expiring for millions of Americans, today’s retail sales figure shows us there is still some gas in the tank for the consumer. The overall level of retail sales is well above pre-pandemic levels, however, when you dig deeper into the underlying data, businesses that have been hit the hardest continue to struggle. While the topline retail sales figure may look decent, the underlying data underscores the need for additional fiscal support as the current spending patterns are unlikely to be sustainable.”

Mike Loewengrt, Managing Director, Investment Strategy, E*Trade:

"Amid a stagnating labor market, the jump in retail sales this month suggests consumer strength is pretty robust—with the highest number we’ve seen in three months. The momentum on that front could be a positive for the market as investors look for signs of recovery. That said, it remains to be seen if this is an outlier or trend. Retail sales could take center stage in the months ahead as holiday season quickly approaches. Retailers certainly have had to pivot during the pandemic, so we’ll see how they keep up with consumers to close out 2020. Further, while a resilient consumer is a broad positive for the recovery, today's results could reduce the pressure on lawmakers to get any stimulus measure through before the election."

Steven Ricchiuto, Chief U.S. Economist, Mizuho Securities:

"The lack of a phase IV stimulus program had been readily expected by most economists and strategists and, as the prospect of a deal faded, the consensus forecast was downgraded. Over the past month, the Blue Chip consensus trimmed expected average real growth over the first six months of next year by 0.4% per quarter. This downward adjustment continues even into the second half of next year to a lesser extent, down another 0.2% per quarter. For all of 2021, year GDP is generally seen as rising by 3.6% now instead of the 4% anticipated just a month ago when a stimulus plan had been expected. Clearly, there is more at work here than just the lack of additional fiscal policy. Offsetting a portion of this lost stimulus is the better than expected real sector data recorded over the past month, especially the better than expected labor market data, the more resilient manufacturing data, and the continued healthy pace of consumer spending. Our more conservative macro forecast never included a fourth stimulus package, as our calculations never showed it was necessary for a sustained recovery and election politics were always going to be an issue as negotiations pushed past the summer recess.” 

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