Did the Stock Market Rally Too Much Last Week?

The stock market may have rallied too much last week on excessive optimism regarding two of the non-economic issues mentioned in my blog -- Trump's health and the potential for additional fiscal stimulus.  But, a pullback may be modest and short-lived.

There may be less significance in the apparent resolution of these two issues than believed.  There is still much uncertainty about the size and timing of a stimulus bill.  Also, Biden's growing lead in the polls increases the odds that Trump will lose power in Washington even if he stays healthy.  Perhaps reflecting this changed status, some Republicans have voiced opposition to his upping of a stimulus package.  And, the Democrats don't look keen to compromise further. 

However, there are developments that could be market positives this week.  Apple's product announcement (October 13) and Amazon's Prime Day (October 13-14) should provide a boost.   Also, there is hope that corporate earnings reports, which start this week, will be better than expected -- as  have some early releases.  

Some more distant developments should limit a market pullback, as well.  A Democratic victory for the presidency and Senate would likely result in a large stimulus bill.  For awhile, the immediately positive effects of such a bill could outweigh the anti-growth implications of other policies they espouse.

Another development that will likely cushion any negative fall-out will be expectation of a successful vaccine.  News reports suggest a vaccine will be ready by the end of the year and be available to all the country by Spring.  A forecast of a post-vaccine return to normalcy should be a significant market positive after the November elections.  Even if Biden wins and the Democrats take control of the Senate, a return to normalcy would give the economy a boost ahead of any drag from their policies.

The most interesting US economic data release this week should be the September CPI.  If the consensus estimates of 0.2% m/m for Total and Core are correct, they would underscore the long time, if not difficulty, the Fed may face in making up for the past shortfall in inflation relative to their 2% target.  The annualized pace in September would be 2.4%.  It would likely be less for the PCE Deflator, which is the measure targeted by the Fed.  

Other data should confirm good economic growth in the last month of the quarter.  Consensus looks for +0.6% m/m Total and +0.4% Ex Auto September Retail Sales and +0.6% September Industrial Production.  While these gains are less than in August, they are still strong.