New president; same market
David Joy – Chief Market Strategist, Ameriprise Financial
Weekly markets commentary — Jan. 19, 2021
Last week’s economic reports showed the ongoing bifurcated impacts of the coronavirus. Retail sales in December fell for the third straight month, and the November decline was revised lower. Small business optimism fell for the second straight month, to its lowest level since last May. Consumer comfort fell for the eighth straight week, and weekly jobless claims rose to their highest since mid-August. At the same time, industrial production exceeded expectations while rising for the third straight month and the fifth month in the last six. And mortgage applications surged higher for the week of January 8, for both purchases and refinances, as rates hovered near their low.
The ongoing weakness in the service sector prompted President-elect Biden to propose a $1.9 trillion stimulus package that includes extended unemployment benefits, raises the level of direct stimulus payments, provides money for state and local governments, and funds to speed up the coronavirus vaccine distribution. However, with the slimmest of majorities in the Senate, how much of that proposal actually becomes law remains to be seen.
The president aims to vaccinate 100 million Americans in the first one hundred days of his administration. While that sounds aggressive compared to what has been accomplished so far, it is considered doable. But even if that objective is achieved, it means that only 113 million will have been vaccinated by the end of April. If that pace of one million vaccinations a day is maintained, it will take until Labor Day to vaccinate 70 percent of the population, considered by some to be the threshold for herd immunity. Theoretically, however, social mobility may be allowed to increase incrementally throughout that process, as the most vulnerable are vaccinated in increasing numbers during the rollout.
Stocks fall for the third time in three weeks; small caps fared better
Stocks fell for the first time in three weeks last week. The S&P 500® index shed 1.5 percent, led by weakness in communications services as Facebook fell 6 percent. Conversely, energy stocks gained 3.1 percent and were joined on the upside by Real Estate, Utilities, and Financials. Bank stocks kicked off fourth quarter earnings season and mostly delivered stronger than expected earnings. But those earnings were supplemented by the release of loan loss reserves, while revenues were somewhat light. For the day on Friday, the KBW Bank index fell 3.2 percent as Wells Fargo fell almost 8 percent and Citigroup fell almost 7 percent. Not helping was a five-basis point decline in the ten-year note yield to 1.08 percent. The S&P 500 is now higher on the year by just 0.3 percent.
Small cap stocks fared better. The Russell 2000 rose 1.5 percent, bringing its gain for the year to 7.5 percent. Earnings season accelerates this week, and a year-over-year decline of 6.8 percent is now anticipated, according to Factset. At the start of the fourth quarter a decline of 12.7 percent was anticipated. Full-year earnings are now expected to decline by approximately 13 percent and could improve from there as reporting season unfolds. After first quarter results, full-year earnings were expected to decline by roughly 20 percent.
Growth in China accelerates; the world prepares for Wednesday’s presidential inauguration
While parts of the U.S. economy are sputtering, China continues to accelerate its way out of the coronavirus headwind. Growth totaled 2.6 percent in the fourth quarter, down slightly from 3.0 percent in the third. For the full year, the economy grew 2.3 percent. That is down sharply from the 6.0 percent growth rate of 2019, but China is likely the only major economy to have actually delivered positive growth last year. In contrast, U.S. GDP is expected to have declined by 3.8 percent in 2020. As the year came to a close, China reported a strong gain in industrial production, but some softening in retail sales. China is also currently dealing with some still minor Covid-19 infection flareups, but it has resulted in some lockdowns.
Lastly, the inauguration takes place on Wednesday, and following the heinous events of January 6, an estimated 25,000 national guard troops have been deployed to provide security. In contrast, U.S. troops stationed in Afghanistan and Iraq combined total an estimated 5,000.
Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
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