Canadian equities ended the week flat while the US equities reached new highs mid-week, and European equities climbed on optimism of a trade deal between the UK and Europe. The S&P 500 gained 1.25% for the week, Nasdaq jumped 3.05%, and the small-cap Russell 2000 added 3.07%. The MSCI EAFE index rose 2.4%, with the German DAX increasing 3.94%, leading the other European country indexes. The addition of Tesla to the S&P 500 had many ETFs and mutual funds that mirror the index rebalancing and increasing trading volumes. (Pension plans and endowment funds are expected to rebalance equity allocations in the first quarter if equities close out the year at current levels.)
From a technical perspective, markets are on good footing as market breadth is continuing to be constructive and supportive of higher averages. Market’s anticipatory nature is focused later in 2021 when a significant percentage of populations are vaccinated, and businesses will be back to more normal conditions. In the meantime, the Fed intends to remain accommodative by maintaining its purchase program “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”1 Some investors were hoping the Fed would extend the purchase program to longer-dated maturities. Additionally, Congress passed a $900 billion stimulus package desperately needed for “Main Street” America. Two of the stumbling blocks, help for state and local governments and a litigation shield for businesses, were cast aside to reach an agreement before the Christmas recess. The last blockage is the use of unused funds from the CARES (Coronavirus Aid, Relief, and Economic Security) Act. A group of Senate Republicans want to use part of the $429 billion CARES money to fund about half of the latest $900 billion stimulus package, and Democrats want to use the funds to end-run Congress and rescue states in fiscal turmoil like New Jersey and Illinois.2 The game of semantics continues.
The economic data releases were not all that encouraging. The Commerce Department reported retail sales for November falling 1.1% when surveyed economists were expecting a .3% increase. October retail sales were revised lower to .1% from .3%. Weekly jobless claims were 885,000, exceeding expectations and increasing 23,000 from the previous week’s revised number. Continuing claims fell to 5,508,000 — a new post-pandemic low.3 Industrial production grew at a modest 0.4% in November, and the strong October number was adjusted to 0.09% from 1.1%. The impact of new restrictions is not part of this data set.
Vaccine news was positive with the first doses of the vaccine being administered in several countries and the FDA approval of the Moderna’s vaccine. With the Moderna vaccine, it is expected a doubling of doses will be available by year-end. With infection rates still high and deaths in certain regions still not showing signs of improving, the path to herd immunity appears to be formidable.
Moving to the year-end, we expect higher volumes with portfolio rebalancing and choppy markets. On the political front, uncertainty remains as the transition to the new administration will not be as smooth as hoped. Investors will have to navigate muddy waters for at least the first half of 2021.
Sources:
1 https://www.federalreserve.gov/newsevents/pressreleases/monetary20201216a.htm
2 https://www.wsj.com/articles/hijacking-the-fed-to-bail-out-states-11608248395
3 https://www.dol.gov/ui/data.pdf
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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