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Markets Ignore Events at the Capitol

January 11, 2021
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Monday Morning QB - Market Observations:

  • Markets Have Another Record-Setting Week
  • Politics Controlled the Headlines, Mostly for All the Wrong Reasons
  • Small Cap Stocks Found Favor in the Democrats Sweep of the GA Runoff
  • Setback in the Labor Market – December Job Report Records First Month of Job Losses in Eight Months
  • Rise in Coronavirus Cases Causes Job Cuts in the Restaurant and Hospitality Sector
  • ISM Report Shows U.S. Manufacturing activity has expanded for seven consecutive months
  • U.S. Commerce Department Reported Factory Goods Orders Also Increased for the Seventh Consecutive Month
  • High Hopes for Earnings Season and 2021 Growth
  • 10 Year Treasury Yield Crosses Above 1% for the First Time Since Last March
  • Oil Reaches $50 Per Barrel

Monday Morning QB - Market Performance:

The major U.S. indexes continued to hit new record highs. Small caps outperformed large caps by a wide margin, and energy stocks led the gains within the S&P 500.

The Dow Jones Industrial Average added 491 points, or 1.6%, ending the week at 31,098. The technology-heavy NASDAQ Composite gained 2.4% closing at 13,202.

By market cap, the large cap S&P 500 rose 1.8%, while the mid cap S&P 400 and small cap Russell 2000 surged 4.8% and 5.9%, respectively.

New Stimulus is Likely on the Way

Lost in the mess of last week was a victory by both liberal candidates in the Georgia runoff election, giving control of the senate to the Democrats.

An interesting theme kept creeping into conversations throughout the week. Divided government has produced gridlock and a downright nasty game of politics between our two major parties, evidenced by the scenes at the capitol building.

So, maybe it's time to give one party complete control. At least we know who to blame and/or give credit to depending on the policies' outcomes.

The markets just kept rolling higher during the chaos because markets are forward-looking by nature.

In the short-term, President-elect Biden has expressed the desire to make his first significant initiative a $2,000 check to Americans who have yet to recover from the pandemic. This is only part of a larger infrastructure stimulus package which calls for fixing our buildings, roads, and bridges.

This massive stimulus package combined with the already accommodative Federal Reserve monetary policy should jump-start growth across our economy. The soon to be proposed initiative will not get bogged down by partisan bickering, something new and different.

The stock market moved higher on the prospect of more than initially anticipated government spending at the start of the Biden Administration.

The stock market typically represents a short-term calculation. We will have to wait to see how the market reacts to the anticipation of future legislation (i.e. tax increases).

I would argue the stock market's favorite piece of legislation from the Trump Administration was lowering the corporate tax rate to 1% below the industrialized world's average corporate tax rate.

The Hope in the Upcoming Company Earnings Season

The stock market is also looking ahead with great optimism for the start of the earnings season.

Good earnings typically coincide with a higher stock market. According to data compiled by FactSet, financial analysts are more optimistic on S&P 500 earnings today than compared to the start of 2020 (pre-Covid). FactSet data shows an expected earnings growth of 22.1% in 2021. Should this growth rate materialize, it will be the best growth rate since 2010.

This makes sense.

We are still digging out of a significant economic hole, during which companies have continued to lower their future earnings. The last several quarters have shown a resilient economy with companies within the S&P 500, beating those lowered earnings estimates.

The vaccine rollout has financial analysts looking for better than expected earnings as well as future guidance from company earnings reports.

Earnings season starts on Friday so we will not have to wait long for answers.

The Vaccine Factor and the Effect on Future Corporate Earnings

The vaccine rollout, however flawed at the start, will eventually end in a by and large vaccinated population- a population looking to resume life and all that goes with it.

Companies are anticipating people getting back out there doing their thing in 2021.

For example, the energy sector is expecting to see gains as people start moving around again. Higher oil prices come from higher demand, increasing the earnings of all things oil-related. Oil crossed over $50/barrel last week. Last year the average price per barrel was around $39.

Look for more of the same across much of our sectors.

Our portfolio starts off the new year with a heavy dose of industrials, basic materials, and consumer cyclical stocks/ETFs in anticipation of a return to some kind of normalcy.

Events at the Capitol

It is hard to come to grips with what we witnessed last week.

From a market perspective, it was just another day. The stock market looked past the protest because President Trump's tenure is ending shortly, one way or another!

I am not qualified to comment from a historical perspective; nor do I know how to capture the words to define what we witnessed. I have read and heard comparisons to Pearl Harbor, 911, and the end of Nazi Germany. Whatever comparison you feel is appropriate is up to you but thank God the death toll was not worse.

My heart breaks again, this time for the unnecessary deaths at the Capitol.

An unarmed women was shot and killed, along with a Capitol police officer fatally injured when hit with a fire extinguisher. Five dead in total. The loss of human life in this way is unimaginable. Watching that poor woman die on video, I said to myself there were so many things the police could have done rather than shoot her in the neck. It was the same thing I said to myself watching the George Floyd video.

I wish people would start to see people as people again.

Every human being has a story, sometimes good and sometimes not so good. While you may disagree with the politics of the women shot and killed, she served our country! She deserved to be punished for breaking into the Capital, but she did not deserve to die.

Based on the events that have come to light this year, some of our brave men and women who serve and protect us daily need to do better.

Politicians Need to Take a Long Look in the Mirror

As a registered independent, my one thought is "shame on politicians" for their endless barrage of how bad the people are on the other side of the aisle.

Why the need to vilify the other side? When did we stop treating people with even a dash of dignity and respect? I have heard many politicians say this week that our words matter. Yes, they do, so how about choosing your own words more carefully before pointing the finger elsewhere.

My preferred solution – term limits. Enough with the career politician. How about two four-year terms? It works for another elected official. If one cannot do their job with dignity and respect for others at least we know their time and influence will end. 

Soon-to-be President Biden, in his comments, said, "This is not who we are." Although I generally agree with him in sentiment, my eyes tell me something different.

Since Memorial Day, we have watched protests turn uglier and uglier.

When did it become okay in America to break our laws, beat someone up because they do not share the same opinion, or burn someone's business or property because we are angry, or occupy a city block, or take over a police department, or storm one of our country's most sacred buildings?

I shudder to think of what could happen next in this pattern of escalation.

I do not see these events as different. What I watch is an escalation from event to event through intolerance. When is enough, enough? The minute your protest breaks the law, it is no longer a protest regardless of how important you think your demonstration is.

If it is vital, then show people, educate people and peacefully demonstrate to get your ideas out into the mainstream. Change people's hearts and minds. Violence does not win people over to your side!

We are a country of ideas, so win people over with logic and reason, peacefully and lawfully! Have energy around your cause! Get excited! Just don't infringe on others' rights to live their life peacefully, safely and lawfully.

The America I love and that President-elect Biden describes is big enough for everybody, from all points of view.

Be willing to work for the change with patient endurance. The outcome may be slower to achieve, but the change will last when hearts and minds are changed through the effort.

This month, I challenge you to be extra kind to people that don’t share your same views, maybe that is enough to spark a revolution of tolerance and respect.

(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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