Equities ended the week slightly off the record highs reached mid-week. The TSX ended the week down 49 basis points as energy stocks lagged on news of an increase in US inventories and news that President Biden was quick to keep a promise to cancel the Keystone pipeline between Canada and the US. The S&P rose 1.94%, led by communication services and technology-related issues. The Nasdaq jumped over 4%, and the broader-based S&P Mid-cap 400 gained 1.41%, and the Russell 2000 struggled to gain .45% for the week. The value stocks’ green shoots wilted, as did the small caps’ momentum for the present time. In Europe, equity markets were mostly flat, with investor sentiment fixated on government response to COVID. European governments continued to extend lockdowns and, as is the case in the UK, with no end in sight. Germany has indicated the lockdown restrictions will end on February 14, but unless the number of cases and deaths reduce, restrictions could be extended.
FactSet Q4 earnings reports continued in the week with 13% of the S&P 500 companies reporting. Of those companies reporting, 86% reported positive earnings surprises, and 82% reported positive revenue surprises. To date, the S&P Q4 earnings growth declined -4.7%, and if the -4.7% is the final number, it will be the fourth quarter of declining year-over-year declining earnings. The estimated Q4 earnings decline was for a negative -9.2%. For Q1 2021, two companies have issued negative forward guidance while nine companies have issued positive guidance. The S&P 500 12-month P/E ratio is 22.5, while the 5-year average is 17.6 and the ten-year average is 15.7.1
The unemployment claims report released by the US Labor Department on Thursday continues to underscore the difficulty the new administration faces within the coming months and years ahead. While the weekly number declined slightly from the previous week at 900,000, it is still historically high as job cuts continue.2 Over 10 million people receive benefits from extended benefits programs that can run up to 50 weeks. Another program is available to contractors and self-employed workers, bringing the total on extended benefits to 16 million.
Investors are likely to focus in part on two critical factors in the future. The first is fiscal stimulus, and the second is the coronavirus vaccine rollout and economic impact. The consensus is for another stimulus package passed through Congress, although not as robust as initially proposed. Nonetheless, a package will be passed to support an already-weakened consumer with state and local aid included. Another aspect of the employment picture not receiving much airtime is the small business environment. Small business bankruptcies are at all-time highs. It will take time for those businesses to re-open under new ownership. The overall strength of the economy is driven by the strength of small- to medium-size businesses. With the current lockdowns impacting the small businesses the most, hopes are pinned on the efficacy of the vaccine rollout and the removal of lockdown restrictions to allow small businesses’ resurgence.
The public is already on edge with the draconian lockdowns. The recovery will be slow and uneven, influencing investor sentiment. At some point during the year, the possibility of a market correction is on the mind of most investors as valuations, using the P/E ratios measure mentioned above, are higher than the 10-year average P/E ratio. Non-correlated investment strategies are more important today to protect portfolios against coming volatility.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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