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. 

After falling over 30% since late February, the U.S. equity market notched its fourth-straight monthly gain last week and has nearly recovered all of its pandemic-fueled declines. The economic activity's pullback was confirmed last week, as U.S. GDP fell by a historic 9.6% in the second quarter (32.9% annualized) as the economy locked down from COVID-19. On the positive front, the worst of the economic data appears to be in the rearview mirror. COVID vaccine news continues to satiate, and the most recent income and spending data showed consumer spending rising 5.2% in June. The rebound's strength is attributable to the stimulus provided by the government and has the markets convinced more than ever that central banks will do whatever it takes to prevent markets from being disrupted. Furthermore, markets believe the government will continue to provide massive stimulus – across the board – until things return to normal. Fed Chairman Powell commented last week that "there will be a need for more support from us [i.e., the Fed] and more fiscal policy" and "we're in this until we're well through it," served to only bolster this belief. Fed policy thus far has been successful, so why should the market question its ability to continue?

Central banks, led by the Fed, have been the predominant driver of markets for some time now. By holding down interest rates, they have altered investor behavior and influenced investors to elevate market prices irrespective of the economic backdrop. By maintaining these policies and convincing participants that they are limitless and never-ending, markets have recovered strongly despite levels of unemployment not seen since the Great Depression. In our view, with close to 30 million people currently receiving stimulus-related lifelines, the risk of labor market weakness outlasting government support is becoming more and more relevant. Without additional supports, the improvement in consumer spending will unwind, and the recovery will encounter a setback.

This week, we await manufacturing PMIs to gauge the post-lockdown recovery. Additionally, July economic figures begin to arrive, where the focus will be on the ISM surveys and the employment report. The elevated trend in weekly jobless claims – last week saw the 19th straight week of greater than 1 million jobless claims filed – suggest there are ongoing job losses and that it could be a long while before we get back to normal. Should the July jobs report disappoint, markets could be in for a shock.

Data deck for August 1–August 7: