The Week Ahead – Ten Years

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.

What, tariffs and trade wars? Mr. Market says dust your shoulder off... the S&P 500 and Dow Jones indices both set new record closes last week, even with the latest trade war salvos being exchanged by the U.S. and China to start the week. As many of you know, the market recently marked the 10-year anniversary of when Lehman Brothers went under (still the largest U.S. bankruptcy in history) as well as when Merrill Lynch was purchased by Bank of America. I remember the week leading up to that momentous weekend vividly as my colleagues and I were analyzing various financial institutions and trying to understand the capital and credit requirements for each of them all the while as credit markets froze more and more. Some portfolio managers believed that the Treasury Department would never let a large financial institution fail as it would shock the financial markets too much. Myself and others believed that a sacrificial lamb would be offered up at some point (the optimists were hoping for a small regional investment bank and not a large player). No one could have imagined the aftershocks to the financial markets after Lehman went under. Lately I’ve been reflecting on that period more and more often given it has been ten years, and also as some investors have likened the current trade turmoil as the start of the next Great Financial Crisis. It definitely remains a tail risk but the Great Financial Crisis was something much more different, an attack on the faith of the banking system as we knew it combined with a real estate bubble which put both main street and wall street in the same sinking ship. Recessions are a natural part of the business cycle and, while it has been awhile since the last one, it doesn’t mean that it will be at the same magnitude of the one we last saw.  

In the week ahead, we’ll get the the third estimate for second quarter GDP (currently at 4.2% with a chance of a small revision upward), an update on PCE (holding close to the Fed’s target of 2%), and the much anticipated FOMC meeting. With the market already pricing in a rate hike, the Fed funds rate will soon be in the 2.0% - 2.25% range. The last time the Fed funds rate was at 2.25%? Another 2008 date: March 18, 2008, when the Fed aggressively cut rates by 0.75% as domestic equities hit their lows during the Great Financial Recession. It’s been a pretty amazing decade and it will be interesting to see how much has changed when we look back in another ten years.

Data deck for September 22-September 28: