The major indices that investors often quote were down this week. For example, the S&P 500 was down 1.5%. Yet, a look under the hood reveals a rotation obscured by the shadow of mega-cap stocks.
While the S&P 500 was down this week, that performance was driven by those same mega-cap stocks that led these market-cap weighted indices to new highs in 2020. While the largest five stocks in the S&P 500 (Apple, Amazon, Microsoft, Facebook, Alphabet) were down about 4% on average this week, the other 495 were up slightly. We saw notably positive returns from deep value stocks and small-cap this week, a continuation of a rotation that began in the fourth quarter. Our year-end notes highlighted the concentration risk in market-cap-weighted indices and the opportunity in those segments of the market (namely small-cap and value) that 2020 left neglected. We expect this to be an important theme in 2021 as recovery from the pandemic ensues.
We include a video this week summarizing our synopsis of 2020 and discussing our positioning into 2021.
Consumer Price Index
Inflation remains subdued with Core CPI at 1.6%. Until inflation sustainably passes the Fed’s 2% average target, the risk of the Fed taking the monetary stimulus foot off the gas is low.
Headlines This Week - By The Numbers
President-Elect Biden announced details of his stimulus plan that is expected to cost $1.9 Trillion. This is the “Rescue Package” portion intended to address immediate needs, with a subsequent “Recovery Package” anticipated to be announced in the coming weeks. Highlights include:
- $1 Trillion to households via stimulus checks of $1,400, which will phase out for higher-income earners.
- $415 Billion to combat the virus and distribute vaccines.
- $350 Billion for state and local governments.
- An increase in supplemental unemployment benefits to $400 a week, extended through September.
- Extended paid leave, moratoriums on foreclosures and evictions to September, and increased child tax credit.
The global death toll from the coronavirus is about to hit 2,000,000.
- Tragically, 400,000 is the number the U.S. is expected to reach by month-end.
The Fed’s inflation target is an average of 2%.
- A Core Consumer Price Index (CPI) reading of 1.6% year-over-year was reported this week. It was coming in at 2.3% prior to the pandemic.
- The Producer Price Index (PPI) reading showed even less inflation, with the core PPI, which excludes relatively volatile food and energy, was up only 1.2% year-over-year.
- In a speech, Federal Reserve Chairman Powell said, “now is not the time to be talking about exit” when replying to tempering its bond-buying program, and we are “far from our goals” when it came to the economy.
The Non-Farm Payroll report for December showed a decline of 140,000 jobs. Expectations were for a gain of 50,000.
- Weekly initial jobless claims were not so hot either, with 787,000 new claims.
Ten congressional Republicans joined the Democrats to vote for the impeachment of the President for the 2nd time.
- It is up to the U.S. Senate to try the case, which is unlikely to progress before the new president’s inauguration next week.
The Week Ahead
Joe Biden will be inaugurated on Wednesday, becoming the 46th President of the United States.
- Instead of the usual 200,000 tickets provided to members of Congress to distribute among their constituents, each member will be allotted one guest ticket.
- In light of recent events, security for the event will be heightened, including tens of thousands of National Guardsmen deployed to secure the city.
- Presidential Inaugurations are typically a non-event for financial markets however, any additional unrest at the inauguration has the potential to unsettle markets.
While most of the world has seen Gross Domestic Product (GDP) growth disappear due to the pandemic, China is expected to show a 6.1% year-over-year expansion of its economy in its Q4 report on Monday.
- This is poised to be the first time that China’s GDP growth will reach pre-pandemic levels.
- The forceful response to bring the outbreak under control has allowed the country’s industrial-based economy to rebound faster than its competitors.
Central Bank Week
The People’s Bank of China, European Central Bank, Bank of Canada, and the Bank of Japan will all be meeting next week.
- Each Bank will be releasing its interest rate decisions. Consensus does not expect any changes from each of the Banks.
- Investors will keep a close eye on any fiscal policy changes that could impact markets.
The biggest banks lead the parade of 4th Quarter earnings that started the previous week. But the real fun starts on Tuesday as we get a more diverse group of Blue Chips on the calendar.
- Look for results from Netflix (NFLX) and Goldman Sachs (GS) on Tuesday, Procter & Gamble (PG) and UnitedHealth Group (UNH) on Wednesday, and Union Pacific Corp. (UNP) and IBM Corp. (IBM) on Thursday, to be headline grabbers.
Martin Luther King Jr. Day is Monday with U.S. financial markets and banks closed in observance.
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