- The S&P snapped a two-week winning streak, while the NASDAQ closed lower on a weekly basis for the first time since November 13th.
- The Russell 2K and Small Caps were the standout performer, closing higher for a sixth straight week, adding 1.03%.
- After receiving an FDA panel’s approval on Thursday, the agency granted Pfizer/BioNTech vaccine candidate Emergency Use Authorization (EUA) on Friday, which was widely anticipated.
- A CNBC survey of 20 sell-side strategists showed a slight majority expecting U.S. stocks to continue rallying into 2021, with the S&P rising between 8-20% from current levels.
- Both JPMorgan and Goldman Sachs remained optimistic for 2021 but noted that positioning within certain pockets of the market appear to be extremely “overextended”.
- Stimulus negotiations stalled throughout the week, despite initial headlines leaning more positive after a $908B deal was proposed by a group of bipartisan Senators.
- The S&P 500 index has risen more often in December (73.9%) than any other month since 1928. The 73.9% success rate surpasses April, the second highest month, by 8.3%.
- On Monday, December 14th, markets could not hold onto initial gains and drifted lower throughout the day. There was weakness in equities after NYC mayor Bill De Blasio said the city should prepare for the possibility of a full shutdown.
- Crude oil continued to add to its weekly winning streak which now stands at six straight weeks of gains. The gains come as the Dollar index fell to its lowest levels since April 2018.
- In Germany, Angela Merkel, the country’s Chancellor, announced a hard lockdown starting from December 16th to January 10th to contain the virus during the Christmas season. The DAX Index dropped 1.39% last week.
Domestic equities finished mostly lower on the week with the S&P, NASDAQ, and Dow all closing in the red. The S&P snapped a two-week winning streak, while the NASDAQ closed lower on a weekly basis for the first time since November 13th. The Russell 2K and Small Caps were the standout performer, closing higher for a sixth straight week, adding 1.03% over the five days. Despite closing lower on a weekly basis, the S&P 500 and NASDAQ both logged new intra-day record highs earlier in the week, but finished off their best levels. While the moves seen throughout the week were fairly muted, the S&P 500 fell in four of the five sessions as various factors weighed on equity marketing.
Themes remained largely unchanged from previous weeks with a number of push/pull factors still in place which included:
- Record amount of COVID-19 cases and deaths which have resulted in additional restrictions across the U.S.
- Stimulus negotiations breaking down
- The possibility for a government shutdown (a one-week stopgap bill was passed Friday)
While positive vaccine developments helped ease some concerns, they were not able to completely offset the risk-off tone seen in markets.
Value slightly outperformed growth by 30bps, continuing its recent trend, however both closed the week in the red. Real Estate was the largest decliner on the week, followed by Financials which lagged with weakness in Large Cap Banks. Technology fell 1.43% after semi-conductor and Mega Cap names failed to catch a bid and weighed on the space. The re-opening trade was mixed with airlines and restaurants generally finishing higher, while hotels, casinos and cruise lines underwhelmed. Energy continued its winning streak extending it to a sixth straight week of gains amid the distribution of a COVID-19 vaccine, and OPEC+ announcing a gradual removal of supply restrictions.
While vaccine optimism has been flagged for quite some time as the primary driver behind market price action, investors received final confirmation last week after an FDA panel recommended the Pfizer/BioNTech COVID-19 vaccine. After the approval on Thursday, the agency granted Emergency Use Authorization (EUA) Friday, paving the way for it to be administered by early this week. Moderna’s vaccine is also expected to receive EUA by year-end as COVID-19 deaths top 300K according to John Hopkins. Despite distribution and logistical challenges facing companies and governments, millions of doses are expected to be delivered and provided by year-end.
There have been circulating headlines about stretched valuations, however it has done little to make a dent in mid-long term market expectations. Most recently, a CNBC survey of 20 sell-side strategists showed a slight majority expecting U.S. stocks to continue rallying into 2021, with the S&P rising between 8-20% from current levels.
Additionally, both JPMorgan and Goldman Sachs remained optimistic for 2021 but noted that positioning within certain pockets of the market appear to be extremely “overextended” given the inflows seen in equity markets since the start of November. According to the latest Flow Show report from Bank of America, a record $140B has flowed into global equity markets in the past six weeks, with the largest benefactor being Financials who have experienced their largest four-week inflows since December of 2016. The Energy sector has also seen record inflows over the last six weeks as investors now have a more defined timeline for the re-opening of global economies, with the distribution of a vaccine.
Stimulus negotiations made little progress throughout the week, despite initial headlines leaning more positive after a $908B deal was proposed by a group of bipartisan Senators, and seemed to receive some support by key members of both parties. However, optimism around a potential aid package faded after Senate Majority leader Mitch McConell accused Democrats of “moving the goalpost” as liability protections for businesses, additional stimulus checks, and state/local funding continue to remain the major hurdles.
SANTA CLAUS RALLY
As investors head into the final weeks of what has been a roller coaster of a year, if history is any indication of itself, markets could be finishing 2020 in the exact opposite fashion of how it started. According to Stephen Suttmeier, a technical analyst at Bank of America, the S&P 500 index has risen more often in December
(73.9%) than any other month since 1928. The 73.9% success rate surpasses April, the second highest month, by 8.3%, however only posted an average gain of 1.3% trailing July and April as the largest average percentage gain.
It was an uneventful start to the week as U.S. indices finished mixed on Monday. The S&P 500 and Dow Jones closed lower, while the NASDAQ and Russell 2K overcame broader selling pressures seen throughout the day and ended higher. Consumer Discretionary and Technology were the only two sectors to finish in the green after large tech names outperformed and provided some support. Biotech was another pocket of strength with the Nasdaq Biotech ETF closing up 2.29% after the launch of Pfizer/ BioNTech’s nationwide COVID-19 vaccine campaign in the U.S. Also, adding to the risk-on tone in the space was AstraZeneca’s (AZN) buyout offer of Alexion Pharmaceutical for $39 Billion, in one of the year’s largest deals (Note: Alexion is a current holding in the LFCM U.S. Large Cap Growth Portfolio).
Despite markets opening broadly higher on vaccine optimism, equities were not able to hold onto morning gains. Instead, investors saw weakness as the day went on drifting lower and lower, with equities ultimately closing near their lows of the session. Weakness in stocks came after NYC mayor Bill De Blasio said the city should prepare for the possibility of a full shutdown, adding that residents must prepare for that now. Among the worst performers were names pegged to the re-opening trade, including airlines, hotels, cruise lines and other travel-related companies.
Crude oil continued to add to its weekly winning streak which now stands at six straight weeks of gains. The commodity added 0.90% on Monday after another tanker explosion in the Middle East raised supply concerns in the short term. The explosion at the Saudi Arabian port of Jeddah comes just three-weeks after another tanker was damaged in a possible attack at the Saudi terminal of Shuqaiq. Also providing another tailwind was a weaker USD, as the DXY index (U.S. Dollar Index) fell to its lowest levels since April 2018.
THIS WEEK INTERNATIONAL
Last week, global equities pulled back 0.51% as lockdowns slowed down the recovery making the probability of a no-deal Brexit increase. Energy outperformed the MSCI ACWI index, up 0.81%, while real estate lagged the index, down 1.75%. Growth stocks were down 0.26%, while value stocks declined 0.74%. Investors seized the opportunity to take profits off the table ahead of the seasonal portfolio rebalance. Besides, G7 finance ministers agreed on the need to regulate cryptocurrencies in order to maintain the currency monopoly at the state level. Volatility ended the week higher in Europe and emerging markets.
The European Central Bank (ECB) decided to extend the Pandemic Emergency Purchase Program (PEPP) by nine months to facilitate a faster economic recovery in the Eurozone. The PEPP amount was boosted by $607 billion, although Christine Lagarde specified that the program may not need to be used in full “if favorable financing conditions can be maintained.” The ECB did not update its dividend policy for banks. The Euro STOXX Index slid 1.34% last week, with banks down 6.15%.
In Germany, Angela Merkel, the country’s Chancellor, announced a hard lockdown starting from December 16th to January 10th to contain the virus during the Christmas season. Under the new plan, all non-essential shops will be closed during that period, remote work and schooling will be encouraged, curfews will be imposed in virus hotpots, and emergency aid for companies will be expanded to maximum 500,000 euros. The DAX Index dropped 1.39% last week.
Michel Barnier, the European Union’s chief negotiator, told ambassadors present at a private meeting that a Brexit deal could be closed this week. Boris Johnson has reportedly made some concessions on the level playing field and is now asking the EU to meet the UK halfway regarding fisheries. The British Pound rallied on the news. The FTSE 100 was down 0.05% last week.
China’s credit rating agencies face rising scrutiny amid allegation of fraudulent activity. According to Bloomberg, “the Central Commission for Discipline Inspection disclosed Monday that two former general managers at Golden Credit Rating International Co. are being prosecuted for allegedly inflating the ratings of some firms that offered bribes.” Multiple defaults from state-owned companies last month demonstrated that the implicit government backing is not a free lunch. China’s financial regulators pledged a “zero tolerance” for fraud in the bond market as investors become increasingly nervous of default risk. The Shanghai Composite Index decreased 2.83% last week.
In Japan, the Quarterly Manufacturing Business Conditions Survey by Bank of Japan pointed to an improvement in sentiment from -27 in September, to -10 in December. The popular survey uses a sample size of 10,894 large manufacturing companies to extract a reliable trend in economic activity. The household consumer confidence has been trending in the same direction, signaling a strengthening economic outlook. In fact, the Japan Consumer Confidence index grew from 32.7 in September, to 33.7 in November. The NIKKEI 225 declined 0.37% last week.
In South Korea, the government agreed to buy 20 million COVID-19 vaccine doses from AstraZeneca, Moderna, and Pfizer. South Korea will start importing vaccines in February to monitor how vaccination campaigns in other nations will unfold and any potential side effects. Bank of Korea warned that uncertainties will remain high despite vaccines, as the country faces a third virus wave with daily cases reaching a nine-month high. The KOSPI index gained 1.41% last week..
Nirmala Sitharaman, the Indian Finance minister, announced that the government is working on a fiscal package to help the country recover from the recession. She said, “for the present, I’m not going to allow the fiscal deficit number to worry me because there is a need, and a clear need for me to spend the money.” Economists forecast that the additional stimulus coupled with falling tax revenue will push the annual budget gap to 8% of GDP in the current year. The Nifty 50 Index gained 1.93% last week.
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