- The Fed's two-day meeting is the big event for markets in the coming week, and traders are hoping for more details on stimulus and a possible new program.
- The S&P 500 was very close to being back in the green for the year, adding 4.9% for the week.
- Strategists expect the market's reopening trade to continue driving investors into cyclicals, like financials and industrials, and other stocks that will be do well in an economic recovery.
- The bond market joined in the reopening trade for the first time in the past week, and rates jumped as investors sold safety plays and moved into riskier assets.
Federal Reserve Chairman Jerome Powell is expected to reassure markets next week the central bank will do whatever it takes to help the economy heal. That should be enough to keep investors moving into stocks that benefit from an economic rebound and push the S&P 500 into the green for 2020.
The Fed's two-day meeting is the big event for markets in the coming week. There are a few economic reports, including inflation data, the consumer price index Wednesday and producer prices Thursday. Weekly jobless claims will be important Thursday to see if there's a drop in continuing clams, after May's employment report showed a surprising record gain of 2.5 million jobs.
The reopening trade was in full swing in the past week, especially Friday when stocks surged on the jobs report, which was expected to show a loss of 8.3 million jobs. The Nasdaq broke above its record high set on Feb. 19, and the S&P 500 was just 1.1% away from turning positive for 2020.
Even before the jobs report, investors were loading up on financials, industrials, transports and small caps, which were up more than 8% for the week and 18.4% in the past month. S&P financials were 12.1% higher on the week, S&P industrials were up 10.5, and the NYSE airline index jumped more than 35.4.%.
"I think next week is dominated by the reopening and it will be for another month," said James Paulsen, chief investment strategist at Leuthold Group. "With cyclicals outperforming, small [caps] outperforming, credit spreads coming in and then the bond yields going up, everybody — all facets of the financial markets — are sort of suggesting the same outcome."
The S&P 500 ended the week at 3,193, a gain of 4.9%, and now traders are watching to see if it can scale the psychological 3,200 level. The Dow closed Friday at 27,110, up 6.8% for the week, and the Nasdaq Composite was up 3.4%, at 9,814 after reaching an intraday record high of 9,845 Friday.
Analysts say the market will likely look past the protests that broke out in cities across the U.S. after the death of George Floyd in Minneapolis. Four policemen were charged with murder in his death. Looters joined the protests, some of which turned violent, but they quieted down towards the end of the week.
Stocks were higher for a third week in a row, but a change this past week has been the abrupt lurch higher in Treasury yields. The 10-year rose to a high of 0.95% Friday, a quarter-point move in just three sessions. The move was already underway but got a lift Wednesday when ADP jobs data was not nearly as bad as expected. Yields ripped even higher after the May employment report showed the unemployment rate actually fell to 13.3%, instead of climbing to 20%, as expected by economists.
Bond strategists said the Treasury market was now acknowledging the potential for a recovery, but not in the exuberant way the stock market has been. Since March 23, the S&P 500 has risen more than 45%, but it took the 10-year Treasury until this week to get back the yield level it was at when stocks bottomed.
Paulsen said he believes a new bull market has been launched, but there could be pullbacks and some headwinds for the market coming up.
"When GDP is minus 30%, other issues don't matter. There's just one issue. But as the economy reopens again, the trade battles will matter again, presidential politics will matter again," said Paulsen, adding the budget deficit could also matter. "I think we'll get removed from a sole focus. That isn't quite there but I think it's coming."
The Fed begins its two-day meeting Tuesday, and will release its statement Wednesday afternoon, followed by a video briefing by Powell.
"Whey would the Fed want to disrupt this with anything?" Paulsen said. "They're still going to support the economy. They're going to stay away from negative rates or yield curve management. They're not going to do anything to scare the markets. They might certainly reassure people that they are still ready to provide support."
Ethan Harris, head of global economics at Bank of America, said the Fed may clarify where it stands on some of the extraordinary moves it has taken since it cut rates to zero. The Fed has been supporting the markets with asset purchases and multiple programs for commercial paper, corporate bonds, and municipal bonds, for example.
"We think right now they're just trying to get this Main Street lending program to work. The question is are they going to do more things around what they do in terms of forward guidance and next steps of macro easing," Harris said.
There has been speculation that the Fed would do some type of so-called yield curve control, a program to keep interest rates capped at certain levels. "I think it's too early for that," said Harris. He said the Fed would be guaranteeing low rates for a long period of time if it does yield curve control.
"Yield curve control is basically open-ended quantitative easing," he said. The Fed is currently buying Treasurys but if it wanted to stop yields from rising too much as the economy improves, it could make targeted purchases.
Barclays chief U.S. economist Michael Gapen said it's possible the Fed could announce the yield curve control. "We've said they could implement yield curve control out to three years," he said. "In my mind that matches the length of the horizon of the economic projections."
Powell has said the economy needs more fiscal help, and he could reiterate those comments Wednesday. President Donald Trump on Friday said he backs more stimulus. So far, the Democrats have put out a marker with their wish list for further spending, but there have been no negotiations.
There was concern the strong jobs report could make it harder to get buy in for another big spending package. But some economists say the recovery needs a boost and states need funding to fill the holes in their budgets from coronavirus-related spending and a lack of tax receipts.
10:00 a.m. Quarterly Financial Report (Census Bureau)
FOMC two-day meeting begins
6:00 a.m. NFIB small business survey
10:00 a.m. JOLTS report
10:00 a.m. Wholesale trade
8:30 a.m. CPI
2:00 p.m. Federal budget
2:00 p.m FOMC statement
2:30 p.m. Fed Chairman Jerome Powell briefing
8:30 a.m. Initial jobless claims
8:30 a.m. PPI
8:30 a.m. Import prices
10:00 a.m. Consumer sentiment