The Week Ahead – The Real Story

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. 

The next few months will tell the real story. The U.S. equity market bounced back this week, recovering nearly two-thirds of last week’s correction and leaving the S&P500 within 5% of its January 1 level. Growing evidence that the recovery began in May was bolstered by a record recovery in U.S. retail sales, increasing 18% in May, down 6% from a year ago but significantly better than feared. This brighter news follows a devastating April that was worse than markets expected.

As my colleague, Drew Chan, mentioned last week, there remains a tug of war between, on the upside, substantial improvements in data and policy support, and on the downside, evidence of accelerating COVID-19 cases in several U.S. states. This week saw more of a focus on the positives, with optimism found in strong retail sales data, a commitment by the Fed to purchase corporate bonds, and optimism from both the U.S. and China to commit to the Phase One trade deal despite negative rhetoric.

Despite this more optimistic assessment, many investors underestimate the length of time it will take for consumer behavior to fully renormalize and the economy to recapture peak levels. In our view, Central banks’ liquidity infusions are driving risk assets. Still, unless economic progress continues at a brisk pace, the risk of subdued returns or a market pullback remains. The fact that central banks are stepping in so forcefully suggests they are worried about the future. Why else would they continue to intervene unless they are concerned about indebted companies and the prospect of a slow grind to an economic recovery?

In our view, U.S. Federal Reserve Chairman Jerome Powell’s recent comments are worth repeating to help bring investors back to reality. Among the Chairman’s many remarks, Powell noted:

• “There is a high level of uncertainty over the forecasts.”
• “A good number of Americans won’t likely have jobs to go back to for years.”
• “The virus still poses considerable risks.”
• “The path for the economy will rely heavily on the path of the virus.”
• “The next few months will tell the real story.”

In our view, markets have struggled to reconcile the sharpest-ever quarter-over-quarter decline in economic activity with the announcement of the most substantial economic stimulus packages in history. The result has been high volatility, and we believe this will likely continue. We share Chairman Powell’s sentiments – the next few months will tell the real story.

Regarding economic data, this week, we will watch out for global flash PMIs to gauge the progress of the economic recovery. Close attention will also be paid to initial jobless claims, as 40 million Americans have filed for unemployment benefits since the coronavirus shutdowns.

Data deck for June 20–June 26: