Indices were mixed during the week, hitting new highs by mid-week only to fall-off by Friday. The TSX was an exception holding on to gains finishing the week up .02%. The S&P lost ground, losing 1%, the Nasdaq lost 0.7%, the Russell 2000 gained over 1.06%, and the MSCI EAFE lost 0.1%. The gain in the Russell 2000 was the fifth week in a row the broader-based index exceeded the S&P 500. Market bulls see the outperformance as an indication of significant participation and rotation to cyclical and underperforming value stocks. A broader-based rally is considered more sustainable as a larger number of names participate in the rally. The energy sector advanced with the Brent oil price surpassing $50.00 for the first time since the beginning of the pandemic. Gains in energy were partly off-set in Canada by Healthcare and Consumer Discretionary; technology and real estate sectors lagged in the US.
Investor sentiment continued to be swayed by vaccine news. The FDA released data affirming the Pfizer and BioNTech vaccines with a 95% efficacy and progress reports on vaccine developments from Johnson & Johnson, and AstraZeneca gave the promise of a 2021 end to the virus. The UK administered the vaccine to their first patients and expected to begin a mass rollout using the military to help with logistics. The weekly initial jobless claims surged to 853,000 from 716,000, the highest in three months, and continuing claims also rose to 5.76 million from 5.53 million. New stay at home orders is thought to be impacting the recent initial unemployment claims and slowing job growth. The University of Michigan sentiment data reported a significant jump in investor sentiment to 81.4 from 76.9, the highest since March.1 Additionally, the outlook sentiment for the economy rose the most since 2011. Vaccine rollout hopes are fueling investor optimism for a return to normal despite the increasing number of cases and hospitalizations. Until the vaccine is administered to most of the population, the economic momentum may stall or reverse, as witnessed by the increasing jobless claims.
Washington’s never-ending debate on Congress’s next stimulus bill’s terms and conditions is leaving the main street hanging. Demands from the Democratic side for state and local governments help, and the Republican’s demands for a liability shield for small businesses leave both sides standing their ground. The middle ground wants another round of direct payments. Governor Cuomo, the governor of New York, announced he would be considering higher taxes whether he received government stimulus or not. The trending migration from New York, New Jersey, and most of the northeast in general, Illinois, and California, to mention a few, will put more pressure on already stretched state finances. If the migration trend continues, it will place a headwind on state recoveries if increasing taxes is the primary solution to ever-growing state debts.
Last week’s market comment mentioned an optimistic view on the equity markets for next year. The comment was based on a technical idea of the market and fund flows rather than fundamentals. Many bullish camp members believe the recovery while choppy but see earnings accelerate as the year progresses, and the recovery progress picks up steam with vaccinations. It is still too early to know whether the new US administration is business-friendly or will reverse measures responsible for the last four years’ economic performance. To date, President-elect Biden’s cabinet appointments appear to be a recycled Obama cabinet, likely to change many of the previous administration’s policies. President-elect Biden will also be under extreme pressure from his party’s progressive side to engage their agenda. The next four years will be anything but smooth, and we expect the divisiveness of the last four years to not only continue but increase.
1. The University of Michigan Surveys of Consumers: http://www.sca.isr.umich.edu
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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