S&P 500 Weekly Forecast: Wall Street could be headed for a winter of discontent

The S&P 500 SPX fell 2.5% over the holiday-shortened week.

September is a month that is known to offer high volatility and it certainly has lived up to its reputation so far.

The stock market retook its pre-pandemic highs and touched record highs just weeks ago.

However, following two consecutive weeks of losses, the S&P 500 index is now defending a fall beneath a level seen as pointing to a bearish trend forming in the benchmarks, its 50-day trading average at 3,321.58.

By some gauges, the V-shaped rebound hoped for has played out, yet the stock market froth has been scraped off over the last week or so and there could be some more to go yet.

On Friday, the index was momentarily trading below it when it touched an intraday low at 3,310.47 in a move which may be viewed as a sign that it is about to join the NASDAQ in its descent into a corrective territory. 

In fact, for the first time since April 3, the S&P 500 closed below its uptrend and a drop of another just 3% would equate to a 10% decline from the peak which is commonly viewed by market technicians as an official correction. 

From a bearish vantage point, the outlook for stocks looks more uncertain for investors which have laid the foundations episodes of turbulence.

Investors have started to pay attention to things like Congress failing to pass a replacement relief bill to the CARES Act (which expired in late July), jobless claims plateauing at over 800K per week and 900 deaths per week in the US from the coronavirus. 

A winter of discontent

Looking ahead, there are a number of stark risks for the US stock market.

There are fears that a US recovery in the labour market is not sustainable.

Prospects for recovery on Main Street are concerning and a winter of discontent with large-scale protests across a range of issues are likely to bring further disruptions to Wall Street.

As Congress fails to pass a replacement relief bill, COVID collides with the flu season, and an economic downturn in the run up to the US Presidential election are the perfect storm to spark more unrest and a rout on Wall Street.

For the virus, public health experts have for months been warning of a crisis scenario whereby the severe flu seasons combined with America's persistently high rates of coronavirus transmission would overwhelm the country's health care system.

And Lawrence Gostin, a global health professor at Georgetown University, explained that the United States could have the ideal conditions for such a scenario to occur.

"You've got this perfect storm in autumn. Everyone is back from vacation. Some are going back to work. In some parts of the country, schools are starting," Gostin said.

Julie Fischer, senior technical adviser for global health at CRDF Global, said:

You have a mass migration, and with it people are going to be bringing both influenza and Covid-19.

To me, there is no plausible reason why we wouldn't have both.

She added, "Once we hit cold and flu season, when some of the very general symptoms associated with Covid-19 like fever and cough become more common, then it's going to be a very complex problem in the areas where testing is still being controlled based on symptoms and exposure risks."

The implications for the economy are borne from the impact on people's fear, changes to their behaviour job losses and the weight on US consumption due to increased social distancing.

The threat of flu season comes just as the US unemployment rate began to fall sharply in August as some firms began to hire new staff again.

However, it was temporary hiring for the US census that boosted the job numbers and the unemployment rate is still much higher than it was in February.

Moreover, private-sector job growth in August was the slowest since the recovery began in May.

In April, when many US states issued stay at home orders, the unemployment rate peaked at 14.7%, a potential prelude for what is to come during the flu season. 

Stimulus payments and help for small businesses have been exhausted and negotiations between the White House and Congress over more stimulus are stuck in the mud.

For this, we are watching Congress very closely.

The week ahead

Meanwhile, it’s a particularly busy week ahead on the economic calendar and there are plenty of likely trigger points in the count-down to the US Presidential Elections.

In data, we have the September NY Empire State Manufacturing and August industrial production figures to start us off in the week where a continued upward trend to support hopes of further economic recovery will be watched for.

 August retail sales figures due out on Wednesday as a focus turns to how much consumer spending, key to the US economic revival, is taking place.

Then, the Philly FED Manufacturing and weekly jobless claims, as well as consumer sentiment figures on Friday, will also be of keen interest.

And, not least, we have the Federal Open Market Committee and the monetary policy decision on Wednesday.

Investors might be tempted to skip over the event after the central bank announced a historic change to its policy approach at the virtual Jackson Hole symposium in August, meaning the prospects for further policy changes appear slim.

FOMC in focus

While prospects for further policy changes are indeed slim, important details on how the Fed is intending to put its new average inflation targeting framework into practice should have the market's attention paid. 

We have not had the clarity in this regard from the Fed officials who have been queried over its implementation in the last two weeks.

Inflation forecasts will be of interest as well and knowing just how pessimistic the Fed is for the prospects of a pick-up in inflation over the next number of years. 

The Fed will need to emphasis that it still has monetary policy tools at its disposal or risk undermining the credibility of the new framework, something that would upset the stock market.

We don't expect specific inflation-outcome-based forward guidance yet, raising the potential for disappointment in markets,

analysts at TD Securities explained.

However, we still expect plenty of dovishness, through the incorporation of AIT in the forward guidance—without specificity—the wording on QE, the tone on the economy, the dot plot, and the press conference. 

S&P technical analysis

We have seen an explosion in volume related to the sell-off to at least the 50-day moving averages in the benchmarks, which could signal a change in the uptrend for stocks.

For the S&P 500, it is already crossing below its uptrend and a drop of another just 3% would equate to a 10% decline from the peak which is commonly viewed by market technicians as an official correction. 

4HR chart

While below the 50% mean reversion of the recent drop, the structure there to watch for is between 3200 and 3280.

Meanwhile, the price has already fallen to test below the 61.8% of the mid-July rally as well as the prior Sep low 3336.

A failure of a restest of between there or 3348, the 61.8%, and a 38.2% Fib retracement of the latest downside move, 3355, open immediate risk to the 78.6% Fib that meets the 3280 targets.