By Pete Biebel, Senior Vice PresidentPrint This Post
We’ll be wrapping up another year over the next eight trading sessions, and 2020 has been quite a present indeed. We were all coping with some of the worst national news in a decade, while our lives and those of our friends, loved ones and coworkers were turned upside down. By the end of March, it looked like it was going to be a bah-humbug year. The gift wrap on this crazy year was the market’s ability to look beyond the world’s and our economy’s short-term ills and rebound off a first-quarter shellacking and climb to new highs.
Last week brought another gift. The major averages all had positive weeks with the NASDAQ Composite (COMP) taking the blue ribbon with a gain of just over 3%. The S&P 500 Index (SPX), which was the prior week’s laggard with a loss of 0.96%, recovered all that loss and then some, gaining 1.25% last week. By comparison, the gain in Dow Jones Industrial Average (DJIA) for the week, 0.44%, was a mere stocking stuffer.
COMP is a lock to end the year as the most gifted index. Year-to-date, COMP is up a little over 42%, nearly triple the YTD gain of SPX and well over seven times that of DJIA. And, no, that isn’t a typo; COMP really is up more than 42% for the year. That performance was fueled by spectacular gains in many of the mega-cap stocks that saw accelerated adoption of their services amid the shelter-at-home conditions. Those stocks are all components of one of three industrial sectors: Communications Services, Consumer Discretionary and Technology. Those sectors led all other U.S. equity sectors by miles with YTD gains of between 25% and 40%. The next best U.S. equity sector, Basic Materials has gained less than 18% so far this year. Four other sectors are still in the red for the year. The lump of coal goes to the Energy sector, which, despite a 42% rally from its late-October low, is still down more that 30% YTD. Did I mention it’s been a crazy year?
Last week’s gains came in spite of disappointing economic data and lack of progress on a stimulus package. The Retail Sales data Wednesday morning showed a 1.1% decrease in November versus consensus expectations of -0.4%. But that disappointing news wasn’t enough to stall the market’s climb. On Thursday, the Initial Jobless Claims data was not only significantly worse than expected, but the prior week’s data also was revised higher (i.e. a greater number of initial claims). Still, the averages gapped higher that morning and ended the day at record levels. Negotiations on a fiscal stimulus bill have dragged on for months and the estimated size of the final package has steadily declined. Yet, it seems that the financial media continues to bestow credit for the market’s strength to “promising signs for a stimulus package.”
I don’t want to look a gift horse in the mouth, but it seems more likely that the real impetus for the market’s continuing rally is the fear of missing out. Money managers can’t afford to be underinvested while the averages rip to record highs. With a sleigh-full of cash on the sidelines, the market is rallying because the market is rallying. Buying builds momentum and momentum begets more buying. That phenomenon will continue until it doesn’t. Any catalyst that sends the market into a slide could potentially set off a series of stop-loss orders that cause the decline to accelerate. But, until then, the in-place upward momentum and a seasonal bias mean ‘tis the season to keep on buying but keep a close stop.
In my recent articles, I have enumerated several signs of speculative excess. On Saturday, the Bloomberg news service published an article entitled “A Speculative Frenzy is Sweeping Wall Street and World Markets.” The article suggests that the endless supply of monetary stimulus has spawned the easiest financial conditions in history. One money manager quoted in the article observed, “Sentiment indicators are moving to euphoria.” The article specifically identifies several signs of market froth, including the IPO boom, the options frenzy, the credit rebound and merger mania.
None of that means that the market cannot continue higher. Irrationality knows no bounds. Most analysts seem to be expecting further gains in 2021. After all, the economy will probably be on the upswing. While some experts are forecasting 20% and 30% gains, many more are down around the 10% range. Even if a big gain is in the cards for next year, the current extended condition, rich valuations and excessive speculation are warnings that stocks probably need some sort of timeout or consolidation phase before they’ll be able to climb much higher.
Many investors may be feeling left behind. Unless you owned a bunch of mega-cap tech stocks, your portfolio return for the year may more closely resemble that of DJIA rather than COMP or SPX. But, for the reasons listed above, this is probably not a good time to lose patience and discipline. Stick to your plan. Stocks seem to already be priced for perfection. There’s a lot of room for disappointment in developments over the coming weeks and months. We’re likely to have much better buying opportunities in the coming months.
As I write this Sunday evening, a compromise $900 billion stimulus bill has been passed. Stock index futures are oscillating near unchanged. We’ll find out on Monday whether the news is enough to propel stocks even higher, or if it will be another example of “buy the rumor, sell the news.” One area that could see bullish action Monday morning is in the Financials sector. Bank stocks are likely to be bid up Monday morning in response to the results of the Fed’s latest stress test. Late in the day on Friday, the Fed announced that, as a result of its latest round of stress tests, it would allow the banks to resume share buybacks. The Fed also said that it would restrict the size of allowable buybacks, at least through the first quarter of the New Year. If there was some disappointment in the announcement, it was that the Fed would continue to restrict dividend payouts.
The major averages are still well above levels that would trigger any technical alarms. SPX ended last week a bit below 3710. The first sign of trouble would be taking out the 12/11/20 low near 3633, roughly 2% below the current level. The key levels below that are 3600 and 3550.
The holiday-shortened week offers a grab-bag of economic reports. Though the market still seems to be in a no-news-is bad-news mood, Tuesday’s GDP report and the Durable Goods and Initial Claims data on Wednesday seem to be the reports most likely to spark a reaction.
|Monday 12/21/2020||Chicago Fed National Activity Index, November||0.83||0.55|
|Tuesday 12/22/2020||GDP, Q3, SAAR||+33.1%||+33.1%|
|Consumer Confidence, December||96.1||97.0|
|Existing Home Sales, November, Annual Rate||6.850mm||6.715mm|
|Richmond Fed Manufacturing Index, December||15||11|
|Wednesday 12/23/2020||Durable Goods Orders, November, M/M||+1.3%||+0.7%|
|Durable Goods Orders, ex-Transportation, M/M||+1.3%||+0.5%|
|Initial Jobless Claims||885K||863K|
|Personal Income, November, M/M||-0.7%||-0.3%|
|Personal Consumption Expenditures, M/M||+0.5%||-0.2%|
|FHFA House Price Index, October, M/M||+1.7%||+0.5%|
|New Home Sales, November, SAAR||999K||988K|
|Consumer Sentiment, December||81.4||81.0|
|Friday 12/25/2020||Merry Christmas!|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.