Before The Bell - The major equity averages turned in another solid performance last week. During the abbreviated four-day trading stretch—the market was closed last Monday for the MLK holiday—the charge higher was led by the NASDAQ Composite, which surged 4.2% on the strength of the technology stocks. But it was not just technology, as the Dow Jones Industrials and the S&P 500 Index were in record territory, and the small-cap Russell 2000 continued its ascent that commenced in earnest last fall. The move higher comes despite a continued spike in COVID-19 cases, increased shutdowns, and uneven, at best, data on the U.S. economy. Our sense is that the age-old investment theme “Don’t fight the Fed” is clearly driving the U.S. equity market higher.
The unprecedented monetary and fiscal support for the U.S. economy since the coronavirus outbreak stateside last March, has flushed the financial system with liquidity and produced some easy money for equity market investors. The resultant historically low interest rates and resultant cheap borrowing costs have made for very few attractive investment alternatives to stocks and, hence, equity positions are the best place for investors to park their funds. The shot of liquidity over the past 10 months and promises of more on the way is pumping up stocks. The recent stock market ascent has mostly been driven by hopes that the Biden Administration’s $1.9 trillion proposed fiscal stimulus plan will garner enough support in Congress. Given this accommodative backdrop, we sense that equities will again move higher in 2021, but not without some bumps along the way from the coronavirus pandemic and a still-hurting U.S. economy. The initial weekly jobless claims figures, which came in at 900,000 in the latest week, paint an uninspiring picture of the U.S. economy.
The investment community also is now looking to the ongoing fourth-quarter earnings reporting season for another possible catalyst. To date, the quarterly reports have mostly exceeded expectations—specifically for big financial names JPMorgan Chase (JPM), Goldman Sachs (GS), and Morgan Stanley (MS)—but the beats are not providing much of a boost so far, as they appear to be already factored into valuations. Of note, the latest data from technology heavyweight Intel (INTC) exceeded estimates, but its stock, along with shares of International Business Machines (IBM), fell sharply on Friday and were the primary reasons why the Dow 30 (down 179 points) was the biggest laggard among the major averages on week’s final trading day. However, the investment community was very impressed with Netflix’s (NFLX) latest results and outlook, and the technology stock, along with Apple (AAPL) and the other FANG stocks powered the market and, more specifically, the NASDAQ Composite, higher last week. Speaking of Apple, this week the technology behemoth leads a list of 11 Dow-30 companies scheduled to report their latest quarterly results during this feverish stretch for earnings, which has the potential to drive trading even with all of the daily COVID-19 and vaccination updates.
Notwithstanding the latest move higher by technology stocks, we still think a prudent strategy for investors who want to stay heavily invested in a market that is benefitting from the aforementioned unprecedented monetary and fiscal stimulus, would be to look at some of the value stocks and those sectors that stand to benefit from President Biden’s policies. Given this backdrop, we would continue to look at the ESG (Environmental, Social, and Governance) stocks, the infrastructure plays, and the alternative energy names. The healthcare issues also may get a boost from the Biden Administration’s policies. In general, though, with market valuations looking quite frothy these days—a situation where any bit of negative news can prompt some profit taking—we think investors may want to give the stocks ranked 1 (Highest) or 2 (Above Average) for Safety by Value Line a closer look. Value Line offers screening tools for subscribers that would like to create a list of those good-quality stocks.
So in addition to the heavy earnings news, what else should investors be keeping an eye on this week? The business beat will bring a plethora of important reports, including data on consumer confidence, personal income and spending initial weekly unemployment claims, new home sales, the leading indicators, and the first estimate on fourth-quarter GDP. The investment community also will be very interested in what the Federal Reserve has to say on Wednesday afternoon (at 2:00 P.M. EST) after the completion of its two-day monetary policy meeting. The central bank’s decision and commentary from Fed Chairman Jerome Powell have the potential to move the market during the week’s middle trading session.
Before the market open, the equity futures are pointing to a bifurcated start for the U.S. equity market. Much like Friday’s performance, the technology stocks are likely to give the NASDAQ Composite an early boost, while the Dow Jones Industrials and Russell 2000 futures are presaging some modest profit taking when trading commences stateside. So far overseas, the trading has been mixed. The main indexes in Asia finished higher overnight, while the major European bourses are sporting a lot of red ink as trading moves into the second half of the trading day on the Continent. Worries about increased lockdowns in Europe and forthcoming economic data for the euro zone have investors on edge the last few trading sessions. Stay tuned. – William G. Ferguson