Before The Bell
The first full trading week of December is set to begin with all three of the major U.S. equity indexes at record levels. The Dow Jones Industrial Average, the NASDAQ Composite, and the broader S&P 500 Index added 249, 87, and 32 points, respectively, on Friday, with investors brushing off an uninspiring report on jobs creation (see below). The market, like it was for much of November, was emboldened by hopes that a coronavirus vaccine is close to moving to the distribution phase, with Pfizer (PFE) saying that its vaccine with Europe-based BioTech will be available for partial distribution by month’s end. The vaccine hopes have offset worries about the continued spike in COVID-19 cases across the nation.
What we are seeing on Wall Street during this latest bullish stretch is some notable sector rotation, with some of the value and cyclical stocks, which have not performed well during the pandemic, receiving the attention of traders. On Friday, there was some rotation into the financial and energy stocks, with the latter group getting a boost from the latest round of OPEC meetings on oil production. Specifically, OPEC and its allies outlined on Thursday that it would start to phase in production increases in small increments (roughly 500,000 barrels a day in January). The agreed upon hikes were less than what pundits were expecting, and it gave a boost to oil prices and ultimately the stocks of the major oil producers.
The performance of the stock market often tends to be based on forward-looking assumptions, and these days it is seeing Wall Street look beyond the current environment, which includes a notable spike in COVID-19 cases, and to a time when there will possibly be a significant distribution of COVID-19 vaccine early next year. Investors are hoping that a partial return to normality at some time during the first half of 2021 will led to a realization of pent-up demand from the coronavirus-induced slowdown during 2020. The economic growth may be broader (not just heavily concentrated to the technology sector like it was during the height of the pandemic last spring) in 2021. Hence, the recent greater interest in the cyclical names than was seen during much of this year. Many pundits believe the prospects of broader economic growth next year will lead to even more focus on the value, small-cap, and emerging-market sectors. Some investors have jumped the gun over the last month, sensing that the out-of-favor cyclical names will rebound in 2021.
As noted above, the investment community did not let an uninspiring report from the labor market derail its forward momentum on Friday. The report showed that nonfarm payrolls grew by 245,000 positions in November, which in normal times would have been a strong figure, but it badly missed the consensus expectation calling an increase of 460,000. On the positive side, the unemployment rate continued to fall, coming in at 6.8% last month, and weekly new jobless claims (released last Thursday) showed the first drop in new unemployment claims in three weeks. Perhaps also comforting investors were some positive figures on both manufacturing and nonmanufacturing activity last week. Specifically, manufacturing activity expanded for the seventh-consecutive month in November.
Turning to the week at hand, the earnings news will be light, with third-quarter earnings season now mostly in the record books. It also will be a quiet week for the business beat, with the only notable reports, in addition to the weekly initial unemployment claims, on producer (wholesale) and consumer prices. Given this backdrop, we expect the focus of the investment community to be on COVID-19 and the possibilities of a vaccine soon being available for frontline workers and those individuals with preexisting medical conditions. Will this, and some growing hopes that a stimulus package may be possible, be enough to lay the groundwork for a Santa Claus rally? House Speaker Nancy Pelosi said that she has had some discussions with Senate leader Mitch McConnell, and believes that another stimulus package (in the area of $900 billion) may be possible by Christmas. We shall see, as this situation remains fluid, but does have the potential to provide some more wind in the sails of the bulls before year’s end.
Before the market’s open, the equity futures are presaging some modest profit taking stateside when trading commences. Overseas, the trading has been mostly bearish. The main indexes in Asia finished lower overnight, despite a report showing that China’s export activity increased by 21.1% in November, the best monthly advance since February, 2018. Meantime, most of the European bourses are modestly in the red, as trading moves into the second half of the session on the Continent. Our sense is that investors should keep a close eye on the situation across the pond, as there are reports that the Brexit negotiations between the United Kingdom and the European Union may collapse in the next few hours. This could potentially roil the international indexes. Stay tuned.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
