Week Ahead: Can Rebound Data Continue Boosting Markets As Reopenings Reverse?

As trading came to a close on the holiday-shortened week, the S&P 500, Dow Jones and NASDAQ pushed higher after monthly jobs data proved more robust than expected. It was another positive milestone following the best quarter for the S&P 500 in 22 years and the strongest quarterly performance for the Dow since 1987.

Still, exuberance was tempered by the realities of COVID-19: the number of confirmed cases in the US continues to rise, currently closing in on 3 million, with spikes across the South and West. Florida and Texas reported new record high, daily case confirmations on Saturday with some states suspending, or even reversing reopening plans.

Good economic news nothwithstanding, the pandemic spread continues to weigh on the V-shaped recovery narrative many investors have been counting on.

Having reached the midway point of 2020, it's worth looking back at where we've been—and where, perhaps, we might be headed. Equities are down 4% YTD, but unless you’ve been in a coma, you're well aware of what a wild ride it's been over the first six months of this year.

At the start of 2020, markets hit new all-time highs, but in March those heights were toppled by the global spread of coronavirus. Stocks rapidly tumbled into the most acute bear market plunge in history; the pandemic also fostered the sharpest recession since the 1930s.

But investor appetite for risk—fueled by unprecedented government and central bank stimulus—triggered what ended up being the fifth best quarterly advance in the postwar era.

Though we've been consistantly bearish on the markets, now would be an appropriate time to acknowledge how wrong we’ve been. Granted, we still can’t wrap our minds around how enthusiastically investors have been willing to risk their money during the worst global pandemic in one hundred years amid devastating economic data.

The only explanation we can come up with is the unprecedented amounts of fiscal and monetary aid being handed out globally. Whether we believe the Fed can, in fact, provide “infinite QE,” what matters is that investors, it appears, have completely bought into the idea.

To be clear, we still don’t trust this rally. We see it as having been built on hopes and dreams of an alternative economy—on steroids. We never would have imagined stocks would do anything but collapse below the March lows, not to mention provide some of the best returns of all time.

Plus, some of the statistics are stunning. For stocks:

• While US equities ultimately fell 4% in the first six months of the year, traders enjoyed a target rich environment, with some of the best upside reversals many may not have seen during their entire careers till now, including a 35% drop from record peaks in February to a 44% surge from the March bottom and finally a second quarter that rebounded into the 3^rd strongest quarter in the same period (’75, ’87)
• The current, $10 trillion rally hinges on earnings results no one yet has a clue about. Over the last three months, given the level of health- and economy-related uncertainty, 80% of S&P 500 firms didn't provide forward guidance.

Get The App

Join the millions of people who stay on top of global financial markets with Investing.com.

Download Now

For the economy:

• The longest expansion for the US finally came to a halt, contracting 5% in the first quarter of 2020, the sixth sharpest drop since 1950, the worst economic decline since the Great Depression.
• One could use recent economic data—including a powerful rebound in home sales, consumer confidence, manufacturing and jobs—to posit the country is finally recovering. But the rebounds may also be so sharp because they followed earlier, record declines. The real trick will be for future releases to maintain this momentum.

Moreover, given that investor optimism was so high when the outlook for restarting the economy was still fresh, will that perspective persist if new lockdowns or rollbacks accelerate in tandem with the rising number of COVID-19 cases?

Though the S&P 500 closed higher for the week, it was the fifth straight week of whipsaw conditions, with no two weeks of activity in the same direction. This makes reading the technicals more difficult, but here's how we see it: