Market Strategy 1/25/2021
Come Together
Covid-19, mutant viral strains and vaccine supply chain hurdles failed to rattle stocks much as President Biden and his administration moved into place in Washington DC last week
Key Takeaways
- As the new Administration took its place at the helm in Washington, D.C., stocks rose to new highs last week.
- In the weeks ahead, investors will likely begin to see how members of both sides of the aisle on Capitol Hill will address areas in which they have more common ground to arrive at solutions as well as problematic issues that will test negotiation skills.
- Q4 earnings season is off to a positive start with about 40% of firms in the financial sector having posted earnings growth of 18.3% on the back of 2.1% revenue growth. This week 119 more firms are scheduled to report.
- We update our “maximum drawdowns” table to include more annual data going back to 1990.
In the early days of a new administration in Washington, DC not always but sometimes there is a “honeymoon period” in the early part of a transition. The markets in our recollection take little interest in such honeymoon periods but rather focus on the outlook for policy and its projected effects on the economy and corporate earnings.
In our view the US market seems to favor the thought that President Biden’s policies from an international perspective are likely to take a more traditional path when it comes to diplomacy including trade negotiations and US participation in international efforts tied to global climate change. We believe the market sees this change as highly favorable.
Domestic policy is where the market and investors are likely to experience less ease in riding out the current transitional period in highly sensitive areas such as taxation, regulation and social programs where interpretations of what needs to be done, how it should be done and if it can be done often differ so much not only between the parties but amongst the parties themselves, their memberships and their constituencies.
Climate change and alternative energy policy will likely reveal a mixed bag of issues some of which will be easy for both sides to find common ground on while others will prove difficult to negotiate. The opportunities for technological solutions to meet the challenges presented in addressing climate change could provide a platform for meaningful negotiations between the parties that diverse constituencies in the markets might like to see.
Infrastructure investment has long been considered an area in which both sides might find more to agree on than not.
In our view a well thought out and negotiated investment in domestic infrastructure would be highly beneficial for the country’s economy not only near term but for generations of Americans in the future. The infrastructure programs initiated by the Eisenhower administration contributed to the economy for several decades and during administrations of both parties until other agenda items including geopolitical risks took political precedence. Cyclical and secular trends in technology could well be deployed should infrastructure becomes a top agenda item. The potential for job creation and investment could be both socially and economically productive.
Time will tell over the course of this year what type of progress will be made by the new administration. For now it would seem that sentiment on Wall Street is at very least cautiously optimistic.
Markets Were Constructive Last Week
Last week equities stateside saw major indices across market capitalizations close higher on the week notwithstanding some mixed performance last Friday. For the week the Dow Jones Industrials, the S&P 500, the S&P 400 (mid-caps), the S&P 600 (small caps), the Russell 2000 (small caps) and the NASDAQ Composite (some 40% weighted in technology and tech related names) respectively advanced 0.59%, 1.94%, 1.59%, 1.63%, 2.15% and 4.19%.
Among the 11 Sectors of the S&P 500 communications services, information technology and consumer discretionary each outperformed the underlying benchmark on the week respectively gaining 5.95%, 4.38% and 3.09%. The outperformance delivered by these three sectors, each of which contains large cap growth components, suggests to us that recent market activity in which value outperformed growth from September 23 through the end of last week point to a broadening of investor appetite for equities across sectors, style and market capitalization rather than a move markedly away from growth into value. We see investor appetite for diversification as an important development for the bull market that has emerged from September 23 of last year. A continued recognition of the importance of technologogy and “growthier issues “ in such a diversification move appears reiterated in last week’s stateside markets.
With the markets near record highs we believe it is important for investors to keep things in context. In our view what some have called “pocket bubbles” indeed exist including those found among “story stocks”, speculative plays, crypto currencies and some IPOs and SPACS.
That said, a broad array of value and growth equities remain attractive in our view not solely in consideration of low interest rates that could stay low for some time but in consideration of the prospects that exist for an economic recovery stateside and around the world once science and social cooperative effort manage to put COVID-19 and its mutant kin into a manageable space and into the rearview mirror.
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