Markets, Economy

Weekly Kickstart (12/21/2020-12/25/2020)

12/21/20 8:00 AM

iStock-626627280.jpgStocks continued higher last week, as the S&P 500 rose by 1.25 percent to 3,709.41. That left the benchmark index up 14.81 percent 2020-to-date, and just 0.35 percent below the all-time closing high. Government policy was the main driver of last week’s market price action. On the fiscal front, lawmakers continued to work out the details of the slimmed-down relief package, and over the weekend an actual deal appears to have finally been reached. As for monetary policy, the FOMC as predicted in the previous Kickstart upgraded its assessment of the economy while still reassuring markets that rates will not be rising anytime soon. A separate issue investors are already monitoring but will increasingly focus on in the year ahead is corporate profits. Indeed, in October we said that the third quarter earnings season could once again see a lot of upside surprises due to lingering pessimism and general analyst caution stemming from the ongoing pandemic. This was correct because with basically all of the companies in the S&P 500 having now released their Q3 results, 84 percent have reported earnings per share (EPS) figures that exceeded the consensus forecast, according to FactSet. That matches the highest percentage of S&P 500 companies reporting a positive EPS surprise since FactSet began tracking this metric in 2008, and in aggregate companies have been reporting earnings that are 19.5 percent above estimates, more than triple the 5-year average.

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Aggregate S&P 500 earnings growth, though, is still deep in negative territory on a year-over-year basis, which along with the recent record highs in the broad market highlights how investors tend to care more about what is going to happen with earnings as opposed to what has already happened. Moreover, as bad as earnings have been this year the general outlook is that things are already starting to get better (or at least become less bad) and that this trend will continue along with the economic recovery. In fact, analysts currently see earnings growth returning to positive territory as early as Q1 2021, with the pace of growth forecast to gain more momentum over the course of the new year. This could go a long way to help mechanically lower price-to-earnings (P/E) ratios and other multiples back to more normal levels. However, all of this optimism presumably hinges on a lot of things going right in the coming months, e.g. a smooth vaccine rollout and perhaps even additional fiscal relief passed by Congress, and therefore a surprise development could provide a catalyst for another uptick in market volatility. Many experienced 401(k) investors can fortunately look past these potential day-to-day swings in stock prices and instead remain focused on the long-term objective of preparing for retirement through years of routine, tax-advantaged plan contributions. As for those investors less comfortable navigating such an environment, consider using the latest market rally as another opportunity to review your positioning and make sure it is properly aligned with your risk tolerance, nearness to retirement, and other unique variables. These periodic reviews can help identify potential portfolio imbalances ahead of time rather than waiting until the market has already moved against you and your options feel much more limited. As always, we are here to help with any questions you may have.

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To recap a few of the things we learned about the economy last week, the positives included that trade-related inflation pressures remained muted, mortgage applications rose, housing starts lifted, building permits climbed to a 14-year high, industrial production firmed, and capacity utilization increased. As for the negatives, homebuilder optimism softened, gauges of regional business activity sent mixed signals, retail sales growth disappointed forecasts, and the number of Americans making first-time claims for unemployment benefits jumped to a 4-month high. This (holiday-shortened) week the pace of economic data slows down but there are still a few important reports on manufacturing, housing, consumers, and GDP growth scheduled to be released.

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What To Watch:

Monday

  • Chicago Fed National Activity Index 8:30 AM ET
  • 20-Yr Bond Auction 1:00 PM ET

Tuesday

  • GDP 8:30 AM ET
  • Consumer Confidence 10:00 AM ET
  • Existing Home Sales 10:00 AM ET
  • Richmond Fed Manufacturing Index 10:00 AM ET
  • 5-Yr TIPS Auction 1:00 PM ET

Wednesday

  • MBA Mortgage Applications 7:00 AM ET
  • Durable Goods Orders 8:30 AM ET
  • Jobless Claims 8:30 AM ET
  • Personal Income and Outlays 8:30 AM ET
  • FHFA House Price Index 9:00 AM ET
  • New Home Sales 10:00 AM ET
  • Consumer Sentiment 10:00 AM ET
  • EIA Petroleum Status Report 10:30 AM ET
  • 2-Yr FRN Note Auction 11:30 AM ET
  • EIA Natural Gas Report 12:00 PM ET

Thursday

  • 2-Yr Note Announcement 11:00 AM ET
  • 5-Yr Note Announcement 11:00 AM ET
  • 7-Yr Note Announcement 11:00 AM ET
  • Baker Hughes Rig Count 1:00 PM ET
  • NYSE Early Close
  • SIFMA Rec. Early Close 2:00 ET

Friday

  • Christmas Day
  • All markets closed
 

 

Sources: Econoday, FactSet, FRBSL

Post author: Charles Couch

Disclosures