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A Week of Hope

December 07, 2020
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Monday Morning QB - Market Observations:

  • Continuing Vaccine News Provides Hope for a Better Tomorrow
  • Another Record-Setting Week on Wall Street as All the Major Indexes Touch New Highs
  • Market Rally Widens in Scope as New Areas of the Market Lead in the Advance
  • Unemployment Numbers Point to a Slowing Labor Market
  • Covid-19 Hospitalizations Cross 100,000 in U.S.
  • CDC Shortens Quarantine Time

Monday Morning QB - Market Performance:

The Hope rally continued last week with all the major benchmarks hitting new intraday highs by Friday.

The Dow Jones Industrial Average cleared 30,000 points ending the week at 30,218, up 1.0%. The technology-heavy NASDAQ Composite had its third consecutive week of gains, adding 2.1%.

By market cap, the large cap S&P 500 gained 1.7%, while the mid-cap S&P 400 and small- cap Russell 2000 rose 1.8% and 2.0%, respectively.

Dow Crosses 30,000 while S&P 500 & NASDAQ Hit New Record Highs

Investor optimism continues to grow, and why not?

Yes, the Covid-19 numbers in the present are horrible, but the stock market is a forward-looking mechanism. The excitement generated by the continuing vaccine headlines puts the near future in a better light than the present reality.

The reaction to vaccine news continues to change the dynamics of the market. Not so much as a trade-off from one market subset to another but an "in addition to" scenario. The new hottest part of the stock market occurred in the small-cap stock arena. In November, the Russell 2000 index, made up of small-cap stocks, had its best monthly gain since its inception, finishing the month up 18.4%.

The importance of more than just a "tech stocks" rally cannot be overstated. When mid-cap, small-cap, and micro-cap join the party, it adds to the bull market's depth and breadth. More market participants in the rally typically add to the rally's length by giving new money better entry points compared to a narrow rally where investors chase an already overbought market or sector.

Small caps have not been the only area to recover. Since the vaccine news began rolling out, the hardest-hit companies from stay-at-home orders have seen tremendous gain as well. The thought of the return of travel demand helped propel energy stocks, cruise-line operators, and airlines.

The economy is in recovery mode. Money is cheap thanks to the Federal Reserve, and Congress may finally pass a stimulus package to help Americans who have yet to join the recovery party (more on this later). The low unemployment number from Friday will put additional pressure on lawmakers to get something done.

Good forward-looking news has people excited about 2021's prospects for a more typical year. Stock analysts have shown their optimism by upgrading their 2021 forecasts. Everyone is waiting for the vaccines to accelerate our current economic rebound, and investors are banking on it.

Should We Worry about a Slowing Labor Market?

Disappointing labor market news did not hurt the stock market rally. Hope again is winning the day. Yes, job growth slowed again, but upbeat news on the vaccine front gives rise to the hope that hiring relief is coming.

Employers added only 245,000 new jobs in November compared to 610,000 in October. The sharp decline suggests the labor market is slowing significantly because of the rise of Covid-19 cases and tighter restrictions imposed in some areas of the country. With Covid-19 cases at record levels, people expect shutdowns, which means higher unemployment numbers potentially in the short run.

With more than 10 million people still unemployed from Covid-19, adding only 245,000 jobs per month means many Americans will be out of work for a long time. Hopefully, the vaccines speed up the hiring needed to lower the unemployment numbers dramatically.

Covid-19 restrictions and layoffs rightfully fill the news headlines regarding the labor market. However, they do not tell the whole story. An underreported news item is companies are having trouble finding people to fill jobs while at the same time dealing with workers who do not want to come to work. Who can blame someone, who can not work from home, being afraid to be around other people given the rising Covid-19 case count.

While we wait for a vaccine, the weaker than expected jobs number appears to have spawned lawmakers on both sides of the political aisle to get some relief to America's unemployed.

For now, investors appearing willing to look past the current job's number. Adding another stimulus package to help the less fortunate keeps the investment community fixated on a more optimistic future.

Monetary Relief for the Un and Underemployed is Coming, Hopefully!

If vaccine news were not enough to fuel last week's rally, markets got an additional adrenaline shot from a potential new round of fiscal stimulus. A new relief package seemed all but lost until after the inauguration, but both political parties expressed interest in getting something done before December 14.

Lawmakers are still debating the details. What Congress can agree on is a bad jobs report means many Americans are hurting during the holidays. At least our politicians are debating with a self-imposed deadline to get something passed. The current relief package on the table weighs in at $908 Billion.

The proposed bill is a far cry from the original $1.2 Trillion to $3 Trillion initially discussed in the summer. However, any stimulus to pass in a lame-duck session of Congress will likely be viewed as a bonus. Besides, President-Elect Biden has suggested a bigger relief package will be a priority in his administration's opening days.

The stock market will likely find coordinated fiscal and monetary policy between Congress and the Fed a catalyst for higher returns. For stock investors, it is another reason to be hopeful!

A Final Thought…

Last week was all about hope, and the stock market shared in that optimism, moving higher while setting records in the process. All this optimism is fine until it isn't. The larger the expectations get, breeds the higher potential to be disappointed.

The stock market typically does not handle disappointment well. Eventually, investors get ahead of themselves, creating boom and bust markets. So, while we are in a boom, enjoy the party while it lasts. Markets can run hot for some time before finally overheating, especially as more and more investors join the party.

It is the season of hope, after all. "The thrill of hope, the weary world rejoices"… So, don't overthink it and don't be dogmatic. When the facts change, so will we, but we will continue to ride the wave until then.

Have a great and hope-filled week everybody!

(sources: all index return data from Yahoo Finance; Reuters, Barron's, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)
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