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This will be a big week for the financial markets as investors scrupulously watch Congress and government data.

This will be a big week for the financial markets as investors scrupulously watch Congress and government data, according to CNBC.

Congress has been struggling to hash out a new stimulus bill as Democrat and Republican agendas clash. Discussing the amount for the federal unemployment boost has been the main delay. Democrats want to keep the $600 per week boost, while Republicans believe the number is too high. Presidential candidate Joe Biden is also expected to name his running mate this week.

Jobs data will also be a crucial indicator of how the economy is weathering the pandemic. According to Refinitiv, 1.36 million new jobs are expected, a figure significantly less than the 4.8 million added in June. The unemployment rate is expected to retreat to 10.7 percent from 11.1 percent. “August has traditionally been a challenging month for investors,” said Sam Stovall, chief investment strategist at CFRA. Historically, August and September have been the worst two months for stocks.

According to Stovall, the S&P 500 has posted gains in August 53 percent of the time, with an average gain of 0.01 percent dating back to WWII. September is lower 51 percent of the time. However, presidential election years historically have helped financial markets during the challenging month of August. The S&P 500 posted gains 63 percent of the time during an election year, and 73 percent when an incumbent is up for re-election.

120 companies in the S&P 500 are reporting earnings this week as well. “We’re only a month into the reporting period, and things are going to become less and less important from an earnings perspective,” said Stovall. “I think investors are sort of disappointed in that the bar was set so low for second quarter earnings that expectations were that we were going to see a lot of companies beat, which we have. But we were also going to see a gradual uplift of earnings expectations for forward quarters. We’re not seeing that.” 82 percent of companies that have reported so far have beaten estimates, outperforming the average of 65 percent, according to Refinitiv.

“The earnings story is over. My call had been once we had gotten through the earnings season, we would be more vulnerable to a sustainable pullback,” said Barry Knapp, Ironside Macroeconomics managing partner and director of research.  “Obviously, it’s volatility season, but it’s also an election year. ... We’re more vulnerable to that next week and earnings won’t hold us up.”

Furthermore, if President Donald Trump and the Republicans don't start showing better results in the polls by Labor Day, the market will close in on what a Democratic sweep could mean for equities. “If he hasn’t made headway by then, it’s likely he’s done. That’s about the point when things become pretty set in stone. The market will presume that’s the case,” Knapp said.

Other data investors will be looking out for is ISM manufacturing data, vehicle sales, and ISM nonmanufacturing data. “I think the macro data is going to be fine next week,” said Knapp. “I’m not in the camp that thinks the payroll number is going to be negative.”

Last week, yields from 2-year through 7-year Treasuries fell to record lows. The 10-year yield is currently at 0.53 percent, close to a record low. The dollar also fell 1 percent this week, and 4 percent this month. Gold ultimately benefited from these events, gaining 5 percent last week and 10 percent in July.

Investors are concerned about extremely low-interest rates, the economic state, and inflation risk as a result of unprecedented government spending. Inflation-protected bonds have seen a massive influx recently with $271 million for the fund-flows week ending July 29, marking the sixth consecutive week of gains. “I think this is going to be a much more inflationary decade. It will start out slowly. [Fed Chairman Jerome] Powell is right that more forces are putting downward pressure on inflation at present. But the market looks past that,” said Knapp. “The big story in 2021 will be the recovery of inflation. You’re already seeing it in import prices.”

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