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Before The Bell - The first trading week of 2021 looked very much like most of the weekly sessions during the final quarter of last year. That is with the major equity averages pushing higher despite seemingly looking at a wall of worry. The ongoing and intensifying coronavirus pandemic, an economy that is showing some signs of stress (more below), and election results from Georgia last week that did not produce the divided government that many Wall Street participants were hoping for could not slow the bulls. The Dow Jones Industrial Average, the NASDAQ Composite, and the broader S&P 500 Index advanced 1.6%, 2.4%, and 1.8%, respectively. The buying was all encompassing, with the small-cap Russell 2000 surging nearly 6% for the week and hitting an all-time high. This morning, though, we are staring at some profit taking from the record high levels reached last week.

On Friday, the major averages were able to overcome a very disappointing report from the Department of Labor. Specifically, we learned that nonfarm payrolls fell by 140,000 positions last month, while the unemployment rate held steady at 6.7%. The expectation called for a gain of more than 70,000 jobs in December. While this was another major sign that the economy is suffering from the coronavirus pandemic and the pickup in related shutdowns to spread the resurgent virus, investors took the report in stride, believing that it will bring more fiscal stimulus measures from Washington D.C. Hence, another rally on Friday after the major averages started the session in the red.

The unprecedented fiscal and monetary stimulus actions taken since the coronavirus outbreak stateside last March has pumped trillions of dollars into the market. The massive liquidity has helped stocks, as these highly accommodative policies have made for very few active investment alternatives. And with the Democrats controlling both chambers of Congress and the Executive Branch, the consensus on Wall Street is that President Elect Biden will be aggressive will his stimulus plans when he takes the oath of office on January 20th.

So what are investors to do in this environment? Our first suggestion would be to pinpoint what sectors are likely to benefit from a Biden Administration. Since the presidential election in early November, we have seen some notable rotation on Wall Street. Our sense is that the healthcare and infrastructure sectors will get a big boost from the Administration change. The prevailing thought is that alternative energy companies will likely benefit from more regulations on the oil and gas industries. This should help the environmental, social, and governance (ESG) stocks. On this assumption, shares of Tesla (TSLA), the world’s largest producer of environmentally friendly battery-powered cars, have remained on their torrid ascension. The appreciation in Tesla shares over the last 12 months has made Tesla founder Elon Musk the world’s richest person. 

There is a belief that value stocks will get a long look from investors this year after they underperformed for much of 2020. The big winner last year was the technology sector, as the tech giants were the beneficiaries of the social-distancing measures put in place. Individuals and families used technology to work and learn from home, with the cloud computing and cloud-related companies getting a big boost in demand for their product and services. The sharp move higher for the technology group has them trading at lofty valuations and susceptible to some profit taking if the news were to disappoint. For instance, the big tech names fell notably after the Georgia elections results (but did recover later in the week), as it brought fears of regulations and higher tax bills in the coming years. The censorship policies of the technology companies may also receive increased scrutiny, with many in Congress worried about the protection they are given under Section 230. The law protects online platforms from liability for their users' posts and allows them to moderate users' content without being treated as publishers. Even if no changes are made to the current law, a heated debate on Capitol Hill this year may have an effect on the technology space and it is worth monitoring, especially for those with a stake in the high-growth industry.  

Meantime, corporate earnings will come into focus at the end of this week. Banking giant JPMorgan Chase (JPM) kicks off the fourth-quarter reporting season on Friday, with its latest quarterly results before the market opens. In addition to stimulus and vaccine hopes, a solid earnings season may be needed to offset some of the economic concerns and COVID-19 worries. Speaking of the economy, the five-day stretch starts off slow, but we will get a few important reports later in the week, with data due on consumer and producer prices, retail sales, and industrial production. Investors also should note that the latest Federal Reserve Beige Book summation of economic conditions will be released at 2:00 P.M. (EST) on Wednesday. This may provide some more clues about how the coronavirus pandemic is impacting the business beat.

Before the market’s open, the equity futures point to some selling after last week’s noted gains. So far overseas, the mood has been bearish, as the main indexes in Asia finished lower overnight (Japan’s equity market was closed for a holiday) and the major European bourses are in the red as trading moves into the second half of the session on the Continent. Stay tuned. – William G. Ferguson

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.