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Can U.S. Economy Hold Momentum in Q4 After an Astonishing Q3?

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The U.S. economy performed exceptionally well in third-quarter 2020, surpassing market expectations. On Oct 29, the Department of Commerce reported that the GDP jumped a record high at an annualized pace of 33.1% after plunging 31.4% in the second quarter. The figure was also above the Zacks Consensus Estimate of 31.3%. 

While the second quarter's deterioration was the largest after World War II, the third quarter's recovery was also the largest in the same time frame. The previous high was 16.7% in the first quarter of 1950. The astonishing growth of GDP in the last quarter indicated that the coronavirus-induced devastations were not as severe as feared earlier. Importantly, this impressive performance clearly established the fundamental strength of the U.S. economy.

However, this overwhelming performance of the economy in the last quarter was primarily owing to three powerful factors. The first was the unprecedented fiscal and monetary stimulus injected by the government and the Fed together with the central bank's decision to keep the benchmark interest rate at a zero or near-zero level. Second, stabilization in the COVID-19 infection rate resulted in the reopening of a large part of the U.S. economy since June. Third, strong pent up demand resulted in stronger-than-expected consumer spending, the biggest driver of U.S. GDP.

Meanwhile, these three above-mentioned drivers of the third-quarter GDP are currently lingering in uncertainty, compelling several economists and financial experts to raise questions about the much-hyped, V-shaped recovery of the U.S. economy in 2020.

Uncertainty Regarding a Fresh Fiscal Stimulus

The nearly $3 trillion coronavirus-aid package — known as the CARES Act — provided by the Trump administration terminated in July end. After negotiating for nearly three months, the U.S. Congress failed to reach a deal on the size and scope of a new fiscal stimulus.

In the third quarter, personal consumption increased 40.7% annually after plummeting 33.2% in the second quarter. Quarter over quarter, core personal consumption increased 3.5% in the third quarter after declining 0.8% in the second quarter. U.S. consumer expenditure was primarily boosted by the $600 per person per week unemployment benefit and more than $800 billion of payroll protection benefit to small businesses.

At present, we are not sure whether a fresh trench of government aid will come in this year or will be delayed till early next year. A lot will depend on next week's presidential election and the outcome in White House and the U.S. Congress both in the House and the Senate.

Resurgence of Coronavirus

According to the Johns Hopkins University, daily coronavirus cases in the United States have risen a record high by an average of 71,832 over the past seven days. Per CNBC, more than 20 states reported record-high numbers of average daily new cases. Moreover, per the data of the COVID Tracking Project, new cases are rising by 5% or more in 36 states.

In Europe, German officials agreed to impose a four-week partial lockdown and the French government announced a nationwide lockdown in order to curb the resurgence of new COVID-19 infections. The European Commission President Ursula von der Leyen said that the European Union, the U.K., Norway, Switzerland and Iceland alone accounted for 1.1 million cases over the past seven days. Russia also saw a spike in new COVID-19 cases.

More lockdowns and restrictions will hardly hit airlines, leisure-travel, hotels, restaurants, bars, movie theaters, games and sports and other entertainment businesses. These segments of the economy may witness huge furloughs going forward.

Pent Up Demand May Reduce

Lack of fiscal stimulus and delay in complete reopening of the U.S. economy due to spike in new COVID-19 cases may significantly reduce U.S. consumer expenditure. Despite a record jump in third-quarter GDP, the U.S. GDP came in at a seasonally adjusted annual rate of $18.58 trillion, lower than $19.24 trillion in the fourth quarter of 2019. Overall, economic activity is still $660 billion, or 3.5% below the pre-pandemic level.

Moreover, despite the fact that the weekly jobless claims stayed below 1 million for nine consecutive weeks, the absolute figure of over 0.75 million is still extremely high. The unemployment rate at 7.9% is at an alarming level that the 50-year low level recorded in pre-pandemic period. All these factors may lead to low personal income and a reduction in consumption expenditure.

Not All Is Bad in Q4

Nevertheless, it will be an exaggeration to say that the ensuing fourth quarter does to have any positive catalyst. In fact, even without fiscal stimulus, the U.S. economy is growing albeit at a slow pace. Some segments of the economy, especially, manufacturing, housing markets and vehicle sales are outperforming. Moreover, the holiday purchase season is yet to start that will likely to boost the overall economy.

Additionally, a clear-cut mandate for next week's presidential and Congressional elections and any positive development on the coronavirus treatment front, especially for those potential COVID-19 vaccines that are currently at late-stage clinical trials, will bolster U.S. economic recovery.

How to Invest  

At this stage, it will be prudent to invest in large-cap (market capital >$10 billion) growth/momentum stocks instead of investing in reopening or cyclical stocks for near-term gains. Select stocks with a  Growth Score  or Momentum Score of A and strong upside left. These stocks must carry either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

A few stocks that fulfill these criteria include: Zoom Video Communications Inc. (ZM - Free Report) , FedEx Corp. (FDX - Free Report) , Whirlpool Corp. (WHR - Free Report) , The Boston Beer Co. Inc. (SAM - Free Report) , United Parcel Service Inc. (UPS - Free Report) and Logitech International S.A. (LOGI - Free Report) .

The chart below shows the price performance of above-mentioned six stocks year to date.


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