The Week Ahead – Gone Fishin'

Welcome to “The Week Ahead” where each Friday we take a moment to provide our thoughts on what we can expect in markets and the economy for the upcoming week.

For all of the razzle dazzle the markets have seen over the past few weeks we’ve seen a relatively tight trading range in the equity markets this week. Gold has dropped back below $1,300 while the 10-year U.S. treasury continues to float right around 2.20%. Over the last month (the most volatile we’ve seen year-to-date) the S&P 500 has given up less than 1% of its gains. While neither European Central Bank President Draghi or Federal Reserve Chair Janet Yellen are expected to give fresh insight on guidance at Jackson Hole, investors will be watching the language carefully for any potential hints on the future path of monetary policy.

There will be no shortfall of economic data next week as the second estimate of U.S. GDP will be released on Wednesday followed by the latest PCE reading (an inflation reading used by the Fed) and lastly the employment report on Friday. The initial reading for second quarter GDP came in at an annual rate of 2.6% and no material changes are expected for the revision. The Personal Consumption Expenditures index (PCE) will be the most watched indicator as a significant weaker reading may cause the Fed to push out the targeted rate hike in December into 2018. Tying to inflation, the average earnings report on Friday will also be monitored closely to see if wage inflation is gaining any momentum.

While it may have been easy for many investors to have “gone fishin’” over the summer, we have been diligently raising cash as a hedge for increased volatility in both equities and fixed income. Now more than ever, valuations for asset classes across the board are at fair value/over-valued and credit spreads within fixed income have tightened to pre-financial crisis levels. While we do not expect another crisis as the one observed in 2008-2009, we do expect volatility to increase as investors begin to exert more caution.

Data deck for August 26-September 1: