The Week Ahead – The Economy vs. the Market

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.

Over the long run, economic growth is the engine that drives the stock market. However, there are times when the two can behave very differently. Because the stock market is a discounting mechanism, it has the ability to see beyond the current news and look into the future. While the exact time period may vary, markets are generally focused four to six months out. Since the recent March 23 low, the S&P 500 has increased dramatically. Yet at the same time, we saw the economy shrink by 4.9% in the first quarter of the year, unemployment has spiked to 14%, and corporate earnings expectations have plummeted. While that is all very scary, government policy response has been stunning. Thus far, there has been nearly $10 trillion in fiscal stimulus and hundreds of monetary stimulus efforts announced globally since the COVID-19 crisis began. The Federal Reserve and the Treasury have also made it clear that there is “unlimited firepower” if more monetary and fiscal relief is required. Simply put, never underestimate the power of the Federal Reserve to influence asset prices.

Dramatic levels of relief served to limit the worst-case scenario (left-tail risk). These policy responses combined with positive news on both the level of infection rates and interesting new treatments have moved market sentiment from extreme fear (VIX over 80) to a longer-term focus: one that sees what the world may look like post-coronavirus. We will get through this, and while there will certainly be some long-term changes, there will be a return to normalcy at some point.

This week, we will see many difficult economic data points. To wit, it is likely that the unemployment rate will continue to go much higher. However, by the fourth quarter, we are expecting economic growth to turn up. We are already seeing some nascent positive signals (green shoots) from the trucking and restaurant sectors of the economy as stimulus checks are rolling in. The speed of the recovery could even exceed our expectations should we continue to see more human ingenuity in the form of new efficacious treatments and vaccines.

Data deck for May 4–May 8: