S&P 500 Index Weekly Forecast: A time for reflection?

With 456 (91%) of the companies in the S&P 500 reporting, second quarter earnings season is nearly over now and the S&P 500 index is teetering on the edge in the face of an unprecedented economic calamity created by the worst pandemic in modern times.  

Is Mainstreet reality about to hit home?

In jittery summer markets, the uncertainties created by the COVID-19 pandemic in its ascent and the forthcoming US elections, the index has stalled.

Investors await progress on not only a vaccine but also the outcome of a drawn-out debate between the Democrats and Republicans over the details of the next unemployment benefits and round two of the economic stimulus program.

Investors could well now start to think hard of how this crisis, if it goes on long enough, and the unemployed don’t get relief, could tip this recession over a fiscal cliff and ultimately turn it into a true depression.

The Senate wrapped up its session on Thursday without a deal, meaning an aid package may not get passed until after Labor Day which suggests the reality of defaults, business closures and perhaps personal bankruptcies could start to play out on Wall Street.

US has the world’s highest number of confirmed COVID-19 cases 

Meanwhile, the number of coronavirus cases currently exceeds 21 million globally, according to the latest data aggregated by Johns Hopkins University’s Center for Systems Science and Engineering.

The virus has now killed at least 771,276 people worldwide, and the US ranks 10th in the world for deaths per 100,000 people (51.5),.

As of the time of writing, the US has the world’s highest number of confirmed COVID-19 cases (5,361,302) and deaths (169,483). 

However, Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases and a member of the White House coronavirus task force, has satisfied the markets in his optimism for a vaccine that he predicts will arrive by the end of this year, or at least by early 2021.

Fauci has warned that it’s unlikely that a vaccine will deliver 100% immunity and instead has indicated that there can only be between 70% to 75% effectiveness. Meanwhile, there are wider opinions to the contrary which argue that a vaccine has little chance of wiping out the transmission of the virus so soon.

Stalling just beneath the index’s all-time high around 2,397, the S&p 500 has almost fully recovered from the COVID crash and while some presume a continuation above prior peaks the price action hardly instils a lot of confidence as the risk-reward profile is not particularly enticing at this juncture. 

Given the usual summertime lull ahead of a US election, its stands to reason that a consolidation and pause for thought, or, as the chart below illustrates, a modest pullback could occur, allowing for more attractive entry levels following weeks of nearly unabated gains.

Market clearly sees Kamala Harris a good choice

However, we had seen some optimism in the market of late pertaining to the election playbook.

In the latest developments, Joe Biden, the Democratic challenger in November’s US presidential election, has finally picked his candidate for vice president, Kamala Harris, who is a Black and Asian American.

Biden’s chances of winning the November election were given a boost on prediction markets when he announced Harris as his running mate.

The latest poll aggregation puts Biden in the lead with 50% versus 41% for Trump with the rest of voters undecided.

 This day, 11th August, was also the day with the highest trading volume in the past few months, making it one of the most important events in the campaign.

Biden’s policy proposals include expanding Obamacare by offering a public-insurance option; increasing the federal minimum wage to $15 an hour; spending $2 trillion over four years on clean-energy projects; and free COVID-19 testing.

The week ahead

On a week where the Federal Reserve will release the minutes to its July 28-19 meeting, the Democratic National Convention will kick off the 2020 presidential election season.

Andrew Cuomo, Bill Clinton, Nancy Pelosi and Barack Obama will be among the keynote speakers during the 4-day The Democratic National Convention. (The Republican Convention will follow on 24-27 August).

Meanwhile, besides the usual report on US weekly jobless benefit claims, the economic calendar looks light.

Regional manufacturing surveys of the New York and Philadelphia regions may otherwise help investors gauge whether the revival in heavy industry accelerated in August.

S&P 500 pull back territories

While there is a clear possibility of a continuation, 3,700 by year-end is doing the rounds in various forecasts. 

While that may seem optimistic, it would actually be only a 14.5% gain for the year; or, about half the amount the SPX gained in 2019.  

Meanwhile, the following chart offers Fibonacci confluence levels should there be a meaningful pullback: