S&P 500 Weekly Forecast: Best August since 1986, how will September start?

Following a series of outstanding monthly performances, despite the worst recession in modern times, the S&P 500 has so far added 6.6% for the month of August which brings the average percentage gain for the past five months to over 6%.

The index is heading into September on a very solid footing having added half of this month's gains in just the past week, ending up 0.67% on Friday bringing the index to be 3.3% higher for the week.

The index reached fresh highs and was also rising for a fifth consecutive week. At 3,508.01, it was marking a new closing high, up from last week's closing level of 3,397.16.

There will be just one day left to go for the month with little time to reflect on it as the September gets going with plenty on the radar to factor in.

The themes include critical US economic performance updates, domestic politics as the US elections move to the fore and an abundance of geopolitical risks to weigh. 

The apparent disconnect between financial markets

On the economic data front, the apparent disconnect between financial markets and the real economy has left many commentators dumbfounded

Whether the data is good or bad, Wall Street's indexes, to date, have moved higher, brushing aside high frequency and regular economic releases if not consistent with the V-shaped recovery narrative.

The swift rebound in equity prices over the past few months has taken many by surprise.

However, one could argue that continued policy support will be sufficient to avoid the mass bankruptcies which were presumed by the same many and that earnings growth has not been structurally damaged.

The relationship between stock prices and macroeconomic performance is not straightforward.

Major equity indices are not a perfect reflection of the domestic economy.

We can take the ICT sector for an example. 38 per cent of the S&P 500 index is made up of companies belonging to the sector, while the sector's direct contribution to GDP was less than 10 percent in 20171.    

Generally, pricing of stocks is a complex relationship between the 'expectations' of economic performance, relative valuations and uncertainty.

Today, we can definitely pin the coronavirus below the uncertainty tab, but with it comes opportunities which have been carrying Wall Street through the crisis.

For example, sectors that have benefitted from the change in social behaviours are the communication services which had the largest percentage gain last week, up 4.8%, followed closely by a 4.5% increase in technology, another major beneficiary of the crisis. 

It is true, that the giants such as Apple, have been hugely compensating for the worst-performing sectors and without Apple, the S&P would be up only 4.1% on the month, not 6.8%.

However,  the small-cap Russell 2000 is also up about 6% for August and high-yield corporate funds are outperforming all other bond market classes which are indicating that the market is definitely not presuming an imminent economic meltdown.

Keeping the cogs turning

Instead, hopes of a vaccine and a new lower for longer framework at the Federal Reserve are keeping the cogs turning.

However, now that the Fed-Put has been confirmed by last week's Jackson Hole and can be officially written into the playbook, perhaps the rally based on that assumption has already come too far?

After all, the Fed's easy money narrative had been well telegraphed for long enough and priced in.

For the stock market to continue higher from this point on, it may not be down to the tech giants or the Fed, as this is becoming a little old by now.

Stock markets thrive on momentum building catalysts and tend to burn out when the story comes to fruition. This is otherwise known as, buy the news and sell the fact. 

Buy the news and sell the fact

We could start to see that if it would not be masked by improving data releases or even a vaccine, which will make the next chapter and final month of the year on Wall Street a cliff hanger as we head into the US elections in November. 

While there has been an all-time record in a 12% contraction of Gross Domestic Product in the US, should the consumer continue to prove resilient, then what is to say we could not see wartime boom and GDP bounce back with, say, by 20%?

We have already started to see signs of from the bounces in Retail Sales, housing and auto data as well as an improvement in Unemployment Claims,

However, until a vaccine, the consumer and businesses are going to remain nervous, so until that time, it could be an even more rocky road from this point on, despite the Fed confirming the new lower for longer regime. 

A safe and effective vaccine by November, December

This brings us to the latest news on the vaccine front that could help September to get off on the front foot and August's solid foundations.

The race is on and we have AstraZeneca in combination with Oxford University; BioNTech SE and partner Pfizer PFE, as well as GlaxoSmithKline GSK, Johnson & Johnson Merck & Co, Moderna and Sanofi among those currently working toward COVID-19 vaccines.

Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, said this weekend to the Times newspaper in the UK:

I would say a safe bet is at least knowing that you have a safe and effective vaccine by November, December.

On that note, the market will be encouraged to start the week. On the other hand, should there now come a vaccine by the end of the year, the markets will be very deflated head into the New Year.

Without a steady pick up in the economic recovery or the Fed-put theme to carry the indexes over the gain lines, it could well be the making for a winter of discontent in global financial markets.

What is in store for the week ahead?

For the week ahead, we can first look to the economic calendar. Not only do we have crucial IMS indexes, but we also have the highly anticipated Nonfarm Payrolls numbers.

Analysts at TD securities explained their forecast on both:

Payrolls probably rose strongly by pre-COVID standards, but with the pace slowing again.

Our forecast implies a decline of 11.9mn since February, down from 22.2mn through April but still consistent with a huge net increase in slack.

Our forecast allows for about a 240k rise in temporary census workers. The unemployment rate likely remained historically high.

For the ISM Services and Manufacturing, the analysts said:

The ISM indexes likely remained fairly high, even with a decline in the services index.

Still-positive readings have been signaled by business surveys already released for early August, with more data for manufacturing than services.

That said, we suspect momentum will fade as fiscal support wanes.

S&P 500 levels

The market structures on the weekly chart are showing some compelling confluence with the Fibonacci retracement levels should there indeed be a meaningful correction in the near future

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A hold above the prior 202 highs and weekly support structure leave the bulls in control.

However, a test below there opens prospects for a 50% mean reversion towards the 3,200 area. 

A break below the 61.8% Fibonacci and the summer resistances of June and July months, then the dynamic support of a 21 weekly moving average will be in jeopardy.