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Sightline Weekly Market Update: Mixed Messages from Economic Indicators

Equity indices rebounded sharply from the previous week’s losses led by energy, as crude oil prices hit the highest levels in more than a year on an unexpected drawdown in US reserves and investor optimism over vaccination progress and fiscal stimulus. The TSX jumped 4.6%, S&P gained 4.65%, Nasdaq leaped 6.01%, while the Russell rose 7.59% as mid- and small-cap issues continue to outpace large caps. European and Asia equity indices also rallied during the week, recovering the losses from the previous week.

 

According to FactSet data, fourth-quarter earnings and revenues continue to be reported higher than estimates. With 59% of the companies reporting Q4 2020 results, 81% have reported EPS (earnings per share) above estimates, and in aggregate, companies are reporting revenues 15.2% higher than estimates. Both EPS and revenues surprises rank in the top quartile since FactSet started compiling the data in 2008.1

 

As a sign of continuing division, President Biden was unable to convince Republicans to participate in the passing of the $1.9 trillion stimulus package; instead, Republican leadership offered a much-reduced package of $618 billion. The relief package was passed in the Senate on Friday, with Vice President Kamala Harris casting the deciding vote.

 

The week’s economic reports showed an improvement, including the ISM (Institute for Supply Management) gauge for services coming in at 58.7, one full point higher than December.2 (A rating over 50 is considered expansionary.) The weekly jobless claims fell to 779,000, the lowest level since November. The unemployment rate dropped to 6.3% but came as the participation also dropped to 61.4%, with 406,000 workers leaving the work force. If discouraged workers and part-time workers are included, the unemployment number jumps to 11.1%. Shadow Stats’ number based on the government calculation used prior to 1994 comes in at 25.7%.3 January’s new jobs report was the wrinkle in the relatively positive news. A survey of economists ranged between 50,000 new jobs to 250,000. The Labor Department reported jobs added in January came in at just 49,000, short of estimates but much improved over the previous month’s decline.4 Improving economic data helped push the 10-year Treasury higher by weeks’ end to 1.16% and Canada’s ten-year to 1%.

 

The cocktail of positive vaccine news, improving economic indicators, stimulus optimism and continued low interest rates are pushing investors into riskier assets. This past week witnessed a short squeeze on three stocks previously thought by some hedge funds to be overvalued and shorted. It appeared upward buying pressure came from a collaborative group of individuals on the Reddit subgroup “wallstreetbets.” Volatility in the targeted stocks was eliminated by week’s end as the primary brokerage firm, the primary source of the buying, restricted trades.

 

The hope for recovery in the second half of the year could be in question given the job destruction taking place in several sectors.5 The jobless claims of 779,000, while showing improvement over the previous weeks, is nothing short of alarming. The recovery may take longer than currently anticipated as investors become disenchanted and disappointed over weekly initial jobless claims, falling participation rates, and the lack of job creation. As long as fiscal stimulus is provided, hope will remain until leadership decides to pay for the generosity. The promised tax increases on corporations and the wealthy (middle class) will harm growth and are likely to stall any recovery. We suspect at some point in 2021, disappointment will finally hit the market, and we will experience a normal correction (not of the 2020 variety) after one of the steepest market recoveries on record from the bottom in March of 2020.

 

 

Sources:

1. https://insight.factset.com/sp-500-earnings-season-update-february-5-2021

2. https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/services/january/

3. http://www.shadowstats.com/alternate_data/unemployment-charts; https://www.cnbc.com/2021/02/05/jobs-report-january-2021.html

4. https://www.bls.gov

5. https://thehill.com/policy/finance/537475-january-jobs-report-economy-unemployment-coronavirus

 

 

Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors primarily through fee-based accounts.

Sightline Wealth Management LP is a wholly owned subsidiary of Ninepoint Financial Group Inc. (“NFG Inc.”). NFG Inc. is also the parent company of Ninepoint Partners LP, it is an investment fund manager and advisor and exempt market dealer. By virtue of the same parent company, Sightline is affiliated with Ninepoint Partners LP. Information and/or materials contained herein is for information purposes only and does not constitute an offer to sell or solicitation to purchase securities of any issuer or any portfolio managed by Sightline Wealth Management or Ninepoint Partners, including Ninepoint managed funds.

The opinions and information contained in this article are those of Sightline Wealth Management (“Sightline”) as of the date of this article and are subject to change without notice. Sightline endeavors to ensure that the content has been compiled from sources that we believe to be reliable. The information is not meant to be used as the primary basis of investment decisions and should not be constructed as advice. Each investor should obtain independent advice before making any investment decisions.

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