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Defiance. Stocks continued to climb on Friday led by cyclical value shares and small caps. The imminence of a vaccine caused sidelined investors to jump back into global equities.
N O T E W O R T H Y
Accelerant. Stocks continued their epic flight last week, breaking records of post-election performance, and not just in the US. Though it is too early to tell the exact impact, the election results have certainly been applauded by the markets. A new President combined with a split Congress may be perceived as producing more stable policy in the coming years. The Trump-led tax act in 2017 was a windfall for American corporations and was a positive market driver, despite the controversies that emerged in its wake. I have said it many times in my writing: markets don’t like uncertainty and, unfortunately the latter half of Trump’s Presidency has been marred by quite a bit of it, starting with the on-again-off-again trade wars with China, Mexico, and EU and ultimately ending in the devastating pandemic. A bitterly divided, politically charged Congress only added to the uncertainty as it was unable to enact any meaningful legislation beyond the Cares Act, which was unarguably, a crucial factor in turning the economy back onto the road to recovery. The general sense of uncertainty coming from Washington is becoming less burdensome on the markets as the election has passed and we grow closer to closure. The biggest dark cloud over the markets remains the pandemic, and last week’s Pfizer/BioNTech announcement was a clear ray of hope that someday soon this dark chapter will be behind us… and the markets. As the week progressed more positive news from Moderna became available and officials began to speak of tangible plans to begin vaccinations as early as next month. Economic numbers continue to improve, albeit slowly, and corporate earnings have been fairly good. All of these factors have contributed to the recent rise in stocks, most notably small caps… and not the usual-suspect-mega-cap-tech stocks… though they have risen as well. The small-cap Russell 2000 Index reached an all-time high close on Friday, exceeding levels not achieved since late summer of 2018. That is healthy news for equities, as small-cap stocks are considered to be the best overall barometer of economic… and broader market health. This morning, WHILE YOU SLEPT Moderna announced that its vaccine was 94.5% effective in its late-stage clinical trials, sending already positive stock futures yet higher. HOWEVER, COVID-19 cases continue to surge globally with the US setting records in many hot spots. While a vaccine is a welcomed relief, it would not be widely distributed until at least late next year, according to the experts. That means the risk for lockdowns… and economic pain still exists. Though some of President-elect Biden’s experts downplayed the use of widespread April-like lockdowns over the weekend, which was cheered by futures markets. So, the bottom line is that much uncertainty of recent months seems to be abating, though we are far from out of the woods. However, announcements of advances being made in vaccines (as recent as early this morning) have slowly but surely eliminated some painful tail risks in the market. If you are unfamiliar with the term tail risks, just look back to March.
THE MARKETS
Stocks rose on Friday as investors poured money back into the markets in response to positive vaccine news. The S&P500 rose by +1.36%, the Dow Jones Industrial Average climbed by +1.37%, the Russell 2000 Index jumped by +2.08%, and the Nasdaq Composite Index added +1.02%. Bonds rose slightly and 10-year treasury yields climbed by +1 basis point to 0.89%.
NXT UP
- Empire Manufacturing Index (Nov) is expected to have risen to 13.8 from 10.5.
- San Francisco Fed President Mary Daly and Fed Vice Chairman Richard Clarida will speak today.
- This morning, Palo Alto Networks beat estimates and we will hear from SmileDirectClub after the closing bell.
- The week ahead will feature lots of retailer earnings in addition to regional Fed reports, housing numbers, Industrial Production, Leading Index, and Retail Sales. Please refer to the attached economic and earnings calendars for details.
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