Before The Bell
The U.S equity market took a breather last week after a phenomenal bull run in November, which saw the major indexes deliver record 30-day showings. All three of the averages were not able to build off the record levels established in the prior week, with each finishing the five-day stretch modestly in the red. That scenario, at least at the start of trading today, doesn’t look like it will continue as investors wake up to some positive developments both here and abroad (more below).
With third-quarter earnings season in the record books, and a light week of reports on the economy, there were no major catalysts to drive stocks further higher. If anything, the disappointing data on jobless claims on Thursday gave investors a reason to take some profits. Market participants clearly are weighing the spike in coronavirus cases and COVID-19 deaths across the nation against the hopes for a vaccine for the deadly virus. On the encouraging side, the vaccine developed by Pfizer (PFE) and European-based BioNTECH, which has received FDA emergency approval, is starting to be distributed to frontline workers and elderly individuals who have preexisting medical conditions. Although the distribution process will take time to ramp up, it is a major development in the fight against COVID-19 and could possibly keep investors looking ahead and beyond the current worries about the spike in coronavirus cases and increased social-distancing measures that may have a negative effect on an already shaky economy. Additionally, some reports that another badly needed stimulus plan from Capitol Hill, where Speaker of House Nancy Pelosi and Treasury Secretary Steve Mnuchin are in active conversations, may be in the works, could give a near-term shot in the arm to stocks.
This week will be a far busier one for Wall Street than the most recent five-day stretch, as we will receive a number of important reports on the economy. The schedule will include the latest data on industrial production, housing starts and building permits, and retail sales. The latter release on Wednesday morning, which will include the sales receipts from the Black Friday shopping event, will provide major clues to how the retailers are faring during the all-important holiday shopping season. Our recommendation for investors wanting a stake in the retailing sector would be to look at the companies that generate strong online sales and have significant digital infrastructure in place. They are more likely to continue outperforming the brick-and-mortar retailers in a COVID-19 environment that requires social-distancing measures. Indeed, recent data showed Black Friday and Cyber Monday expenditures broke records, with a sharp spike in online purchases buoying results. But, pundits still expect that retail sales on the whole turned negative in November for the first time since April and the height of the COVID-19 outbreak. We expect the consumer discretionary stocks to be a hot topic on Wall Street this week.
The investment community’s focus also will be on the Federal Reserve this week, as it commences its two-day monetary policy meeting tomorrow. The overwhelming expectation is that the Fed will hold rates near-zero, as the economy has shown signs of some cracks in recent weeks (initial weekly jobless claims were higher than expected last Thursday). With no monetary policy changes expected, the investment community will be interested in what Fed Chairman Jerome Powell has to say about the health of the U.S. economy, which many pundits, as noted above, think is in need of some more fiscal stimulus from Washington D.C. Given all the news on the economy this week, we would not be surprised if you see some more sector rotation on Wall Street.
Before the market’s open stateside, the equity futures point to a nicely higher start for the U.S. stock market. The catalysts that were absent last week have resurfaced this morning. The news from overseas was positive, with both U.K. and European Union officials agreeing to extend trade deadlines as they try to finalize a Brexit deal. On these shores, the initial roll out of the Pfizer coronavirus vaccine (to frontline workers and the elderly in nursing homes) is giving investors hope that there is light at the end of the tunnel in the fight against the deadly COVID-19 virus even as cases spike. Any expectation that the nation could possibly turn the corner in the battle against COVID-19 in 2021 may be the impetus needed for a near-term Santa Claus rally on Wall Street. Although equity valuations are looking quite frothy these days and there are some concerns for Wall Street, including COVID-19 and the related recent shutdowns to again slow the spread, any possible missteps with regard to monetary and fiscal policies, and the Georgia Senate elections in early 2020 that will decide if there is a divided government in Washington, which Wall Street seems to favor, it may be the case of a “don’t fight the tape scenario” for a few more weeks as an unprecedented year comes to a close. We shall see…
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
