Most equity indices declined modestly for the week ending on January 15, with the exception being the mid-cap S&P 400 and small-cap Russell 2000. Both the S&P 400 and the Russell 2000 gained .46% and 1.47% for the week, bringing year-to-date returns to 5.10% and 7.33% respectively. The major indices have fallen behind, generating less than 1% year-to-date. In addition to small-caps outperforming large-caps, value stocks outpaced growth stocks, tech stocks were weak and communications services struggled after announcing bans on US President Donald Trump for concerns over inciting violence during the march on Congress. In Europe, the major indices also fell during the week, driven in part by weak economic data and concerns over the resurgence of coronavirus and lockdowns.
Weighing on market sentiment last week was the start of the earnings season, the new US stimulus plan, disappointing economic data, and the second impeachment of President Trump. Thankfully, after January 20, Trump will no longer be in office and leadership will be able to focus on rebuilding the economy.
The Q4 earnings season kicked-off with JP Morgan Chase, Wells Fargo and Citigroup reporting fourth quarter results beating estimated earnings. However, revenues fell short of estimates for Citigroup and Wells Fargo. According to FactSet, as of Friday, “the S&P is expected to report a decline in earnings of -6.8% for the fourth quarter.”[i] The question remains whether there will be more earnings surprises on the upside and whether revenues will beat expectations.
A new $1.9 trillion stimulus plan was revealed but uncertainty remains as to the speed of the rollout. Republican opposition could slow or diminish the package. Conversely, Republican opposition may become a moot point as Speaker of the US House of Representatives Nancy Pelosi has threatened prosecution and removal from office of those Republicans who assisted in the Capital Hill intrusion earlier in the month.[ii] The market decline on Friday was attributed to the Commerce Department when they announced a drop in retail sales for December of .7%, the third monthly decline in a row. Further, the decline in November was revised downward to 1.4% from the earlier reported 1.1%. Excluding automobiles, gasoline, building materials and food services, retail sales fell 1.9% in December. The Labor Department revealed first-time unemployment claims rose to 965,000 confirming signs of a slowdown in hiring to due pandemic restrictions. Industrial production rose 1.6% in December after rising .5% increase in November and 1% increase in October.[iii]
Over the last several weeks, Treasury yields have risen over concerns of inflation. Friday’s retail data provided a pause in the modest trend of moving higher while Treasury bonds moved lower. For the week, longer-dated yields rose slightly over concerns that later in the year the Federal Reserve may have to reassess their low interest rate policy and increase rates sooner than we currently thought. The Fed Chairman continues to reaffirm that the central bank has no plans to raise rates anytime soon, specifically until inflation is running at over 2% for some time.
To date, due to limited supplies and possibly new vaccine resistant strains, the efficacy of the vaccine rollout is impacting investor sentiment and government response. Further restrictive lockdowns will slow the speed of recovery. The hypocrisy of Washington is alienating a vast number of citizens while at the same time eroding small business confidence in a period when small businesses are needed to rebuild the economy. While our leadership talks about inclusion, their response to the coronavirus and other social and economic issues is creating a bifurcated society, which leads to more uncertainty. This uncertainty can only lead to market volatility as the noise of Washington continues to plague investor sentiment.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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