The Week Ahead – Dear Santa

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

Dear Santa Powell,

Merry Christmas to you and the elves at the Fed! Thank you again for taking the time to read our letters from the past few years. This year we are especially thankful for the strong central bank policy steps you took to help combat the economic destruction due to COVID-19. When cracks in the fixed income markets began to show in March, you actively moved forward to help stabilize liquidity and took any chance of a credit crisis like what we saw during the Great Financial Recession right off the table. When you proactively cut rates ahead of your meeting the common thinking was, “interest rate cuts don’t cure viruses,” but what it did was help buy time for our domestic economy while science could find a vaccine.

Each year we state many reasons why it’s still not easy being an investor these days. The global slowdown due to COVID-19 has been unprecedented. Even with coordinated monetary and fiscal policies, many global economies may not touch back to pre-COVID-19 levels until 2022. While the U.S. and China have agreed to some form of a trade war armistice with the Phase One trade deal, tensions between the two superpowers and their allies will continue. Oil has rebounded from its lows (remember when crude oil futures were trading in negative territory in April?!), but current price levels are back to summer 2017 levels. Europe is still a mess, but at least Brexit finally happened. The European Union has made transitioning to green energy a priority as they aim to make Europe climate neutral by 2050. The political divide in America is even bigger than it was a year ago when President Trump’s impeachment inquiry began. We are still feeling the shockwaves from election night.

Over the past few years we’ve always slimmed down our wish list to a single item, “a pause.” The first time was for a pause in rate hikes (2018 seems a lifetime ago). The second time was for a pause in rate cuts. This year rates are already back at zero and you’ve made it clear that it’ll be sometime before you begin raising rates. You adjusted your views around inflation targeting to allow for inflation to run higher, for longer, before stepping in to raise rates. You expanded your balance sheet from $4 trillion to $7.2 trillion. Asking for more at this point would be greedy. So, this year, our wish is once again a pause. Let the market digest all of the monetary and fiscal stimulus and see what’s needed in the future.  

Sincerely,
Wall Street

Data deck for November 27–December 4