The Week Ahead – No Obvious Alternative

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. 

This week marked the beginning of the second half of 2020. The first half of 2020 contained an all-time high for stocks, a global pandemic, the deepest recession since the 1930s, and the sharpest bear market drop on record, followed by a market rally that included the best quarterly gain since the fourth quarter of 1998. Whew, some start to the year.

As we start the third quarter, considerable uncertainty remains. Investors know the virus is spreading and could continue to, yet market prices continue to grind higher. Declining bond yields are helping to re-rate growth equities, and those equities are now so dominant in the market capitalization of the U.S. that even as uncertainty builds, markets climb higher. With the virus showing little signs of subsiding and re-openings of state economies being shut down or paused, fiscal and monetary support will need to remain steadfast for markets to make good on the current optimism.

Admittedly, we continue to expect the environment to be characterized by bad news = good news and good news = good news. Bad news on the virus and/or markets should prompt additional fiscal/monetary responses, which is good news for markets. However, good news is unlikely to reverse the massive spending and expansion of money we have seen over the past year. With the largest peacetime deficit in U.S. history and the highest Federal Debt (%GDP) ever, how can we expect the Fed to raise interest rates sufficient to recapture the money it so easily printed during the downswing without inciting a recession?  With so much debt, a steeper yield curve would crush the economy.

In an election year, policies that may be popular among supporters, but which will slow down the U.S. economy as a whole, are likely to continue. As a result, the Fed is expected to keep hitting the monetary accelerator despite evidence from Japan and Europe that suggests this hinders rather than boosts growth. Unfortunately, there is no obvious alternative.

Next week will mark the start of the second-quarter earnings season, with S&P500 companies widely expected to post the most significant decline in profits since 2009. On the economic data front, we get a slew of updates, including inflation statistics in the U.S. and Europe, consumer price inflation, small business optimism, and preliminary July consumer sentiment readings. Retail sales and housing data will also be noteworthy, considering both are expected to have ramped up in June.

Data deck for July 10–July 17: