- Equities finished higher to end the shortened holiday week, led by the NASDAQ which gained over 4%.
- The big story throughout the week was the reversal of Value’s recent outperformance.
- Positioning in FANMAG (Facebook, Apple, Netflix, Microsoft, Amazon, Google) is at its lowest levels since mid-2019, following along with Bank of America’s Global Fund Manager Survey which revealed allocations to the Tech sector have been cut to their lowest levels since 2018.
- According to FactSet’s Earnings Insight, companies who have released 4Q results are beating estimates by an average of 22.4%, well above the one and five-year average beats respectively. However, investors are not rewarding them for the better-than-expected announcements.
- Relations between the two largest countries seem calmer under the Biden administration, with U.S. officials saying they will be approaching the relationship with “patience”.
- U.S. junk bond sales have already set a new January record, edging over $38B, surpassing the previous record set last year of $37.2B.
- According to French weekly newspaper JDD, France could go back into another lockdown “within days.” The CAC 40 Index dropped 0.9% last week.
- In Italy, the government won a confidence vote in the Senate after getting challenged by members of its coalition. Italian stocks dropped 1.3% last week.
- China President, Xi Jinping, indicated that is was time to put an end to “an outdated Cold-War mentality.” The Shanghai Composite Index advanced 1.1% last week.
- In Brazil, President Jair Bolsonaro faces mounting pressure as protesters crowded the streets and called for his impeachment over his handling of the COVID-19 crisis. The Brazil IBOVESPA Index dropped 2.4% last week.
Equities finished higher ending the shortened holiday week, led by the NASDAQ, which gained over 4%. The Russell 2K added 2%, followed by the S&P 500 and Dow, all which closed in the green. The big story throughout the week was the reversal of Value’s recent outperformance over Growth. Growth and momentum names meaningfully outperformed (IWV +4.1% vs IVE -0.5%) after weeks of seeing the reflation trade gain steam.
Large Tech names were a particular bright spot with Facebook (FB), Apple (AAPL), Netflix (NFLX), Microsoft (MSFT), Amazon (AMZN) and Google (GOOGL) all gaining over 6% on the week, which ultimately drove the outperformance in the Tech, Consumer Discretionary and Communication Services sectors. Semi-conductors were also strong, adding a tailwind for the Technology space as the SOX Index rallied 2.7%. Auto-related stocks, homebuilders, and machinery names were also standouts while Financials and Energy were the two largest underperformers. Energy pulled back slightly (~1.5%) after rallying nearly 13% over the last two weeks, while Financials saw weakness after Banks weighed on the group.
CATALYST BEHIND THE MOVE
Investors attributed the strength seen earlier in the week to positive earnings surprises, a peaceful transition of power, and continued expectations for aggressive fiscal stimulus. Investors appeared to appreciate Treasury Secretary Janet Yellen’s comments during her confirmation hearing, telling the Senate Finance Committee that Congress should “act big” on Coronavirus relief packages to help sure up the economic recovery. Additionally, her testimony also stated that the Biden administration appears to not be prioritizing tax increases, noting that President Biden has not yet proposed lifting the corporate tax rates seen prior to the Republican overhaul in 2017.
While there was not one specific reason behind the renewed outperformance in growth, some believe earnings results from Netflix (+13.5% on the week) helped shift the focus back to growth related equities. While cyclical names have recently outperformed, The Market Ear noted that positioning in FANMAG (FB, AAPL, NFLX, MSFT, AMZN, GOOGL) is at its lowest levels since mid-2019, following along with the results of Bank of America’s Global Fund Manager Survey (mentioned later). The survey revealed that allocations to the Tech sector have been cut to their lowest levels since 2018, and is not the most crowded trade for the first time since 2019.
Fourth Quarter earnings announcements started to pick up throughout the week with announcements coming in better than anticipated. According to FactSet’s Earnings Insight, those that have reported 4Q results are beating estimates by an average of 22.4%, well above the one and five-year average beats of 11.9% and 6.3%, respectively. Although it is still early in earnings season, investors appear to be taking some risk off the table after the announcements. Companies that have beaten estimates have actually seen an average price decline of 1.2% from two days prior to releasing, through two days post their release (compared to the five-year average gain of 0.9%).
MARKET POSITIONING & SENTIMENT
There continues to be no shortage of headlines surrounding a potential correction with the following to points being made by market bears:
- Citigroup’s Panic/Euphoria index recently exceeding levels seen during the 1999 dotcom bubble (Goldman Sachs also echoed similar sentiment).
- Bank of America’s global fund manager survey showed that cash levels have fallen to their lowest levels in eight years while investor’s allocations to risk assets sit at a 10-year high.
- American Association of Individual Investors’ (AAII) bullish reading shows that investors continue to remain positive on equities. Although, it is worth noting the gauge has fallen off its most bullish reading in more than three years seen back in November, remains at elevated levels.
- Put/Call Ratio currently is currently sitting at an extremely bullish ratio of 0.63.
- With the retail trading frenzy continuing, stretched valuations and continued mispositioning may ultimately exacerbate any move to the downside.
It was a volatile session on Monday with the NASDAQ Composite touching another intraday all-time high and closing higher for a fifth straight session. Earnings season is in full swing with a very busy two weeks of announcements (111 of the S&P 500 report this week – with 13 of them Dow components) as roughly 60% of the S&P 500 is expected to report over the next 10 trading days. Heavyweights, Apple, Advanced Micro Devices, Facebook, Microsoft, Tesla, American Express, Johnson & Johnson, and 3M are all on the calendar to announce earnings.
Cyclicals such as energy, financials, industrials, materials, and leisure/travel, which have outperformed recently, took the brunt of the selling pressure on Monday and all closed broadly lower. The Technology sector was amongst the best performers, continuing its recent bout of outperformance. After a quiet start to the year, many large cap technology names seem to be benefiting from renewed enthusiasm ahead of releases later this week.
Elsewhere in capital markets, the yield on the 10-year note declined slightly to finish at 1.03%. In fixed income markets, U.S. junk bond sales have already set a new January record for supply. The previous record of $37.2B set last year was surpassed just 15 trading days into the month, taking 2021’s supply to $38B for January as more debt offerings are expected over the course of the next week.
FEAR OF MISSING OUT
A perfect example of the “FOMO trade” came on Monday when the CBOE Volatility index (VIX) was trading higher even as stock markets were near their best levels of the day. Investors continue to see short squeezes in some of the most disliked names, in what is an ongoing battle between retail traders and Institutional managers. Among the outsized moves were:
- GameStop which saw its 145% surge evaporate, only to close up 18%
- Express Inc. which jumped 132% on Monday
- Blackberry as it finished up 28%
- AMC Entertainment who gained 26% (they also announced the raising of $917M in new equity and debt capital)
THIS WEEK INTERNATIONAL
Last week, global equities rose 1.6% led by Communication Services and Information Technology. Investors took a break from the reflation trade and looked at 2020 winners for hindsight amid rising infections rates and restrictions. In fact, the Solactive Stay at Home Index rallied 4.1% last week. Given the unprecedented amount of stimulus in the economy, most Central Banks decided to leave their main policy tools unchanged. In certain regions, the policy makers’ language is starting to shift from overly accommodative to neutral. As we transition from engineered growth to organic growth, it will be interesting to see which companies and countries emerge at the top.
The European Central Bank (ECB) is working on new ways to assess financial conditions in the Euro area. When asked which indicators are used for monetary policy decisions, ECB President Christine Lagarde said that the Central Bank uses a “holistic approach”. She added, “it takes into account multiple indicators. Bank lending is one, credit conditions is one, corporate yields is one, sovereign bond yields is one and it is by combining all those that we try to assess whether financing conditions are favorable or not.” Regarding additional stimulus, Christine Lagarde said the current level of monetary stimulus is enough for now. The Euro STOXX Index gained 0.09% last week, led by Auto & Parts, up 3.9%.
In Italy, the government won a confidence vote in the Senate after being challenged by members of its coalition. Prime Minister Giuseppe Conte was able to gather 156 votes out of 321, with 16 abstentions and 140 votes against him. His focus will now be on finding a majority to pass crucial spending bills, coordinating the vaccination campaign, and work on structural reforms. The Italian Deputy Health Minister announced a four-week delay in vaccinations due to “a slowdown in Pfizer dose deliveries.” Italian stocks dropped 1.3% last week.
According to French weekly newspaper JDD, France could go back into another lockdown “within days”, as the country battles the spread of the British variant of the Coronavirus. Neighboring countries such as United Kingdom and Belgium tightened restrictions as well. In fact, Belgium announced a temporary ban on non-essential travels a day after European leaders recommended to “strongly discourage” intra-EU trips. The Eurozone consumer confidence dipped in January after a sharp rebound in December. The CAC 40 Index dropped 0.9% last week, while FTSE 100 declined 0.6%.
China’s President, Xi Jinping, indicated that it was time to put an end to “an outdated Cold-War mentality.” He added, “To build small circles and start a new Cold War, to reject, threaten or intimidate others, to willfully impose decoupling, supply disruptions, or sanctions, or to create isolation or estrangement, will only push the world into division and even confrontation.” It was a clear message to the Biden administration to encourage better diplomatic relationships between China and the U.S. Taiwan remains at the center of geopolitical tensions between both parties, as Beijing flew strategic bombers into Taiwan Strait last weekend. The Shanghai Composite Index advanced 1.1% last week.
In Japan, Bank of Japan (BOJ) left its main policy tools unchanged at the last meeting. Central Bank Governor Haruhiko Kuroda said, “yield curve control has worked appropriately and I don’t think the framework itself needs to be changed. But from the standpoint of achieving more effective and sustainable monetary easing, its operations are under review”. The BOJ adjusted its annual GDP forecast to 3.9%, up from 3.6% in the previous forecast. The NIKKEI 225 gained 0.4% last week.
In South Korea, early trade data pointed to rising imports and exports in the first 20 days of January. The Korea Finance Ministry projects 10% increase in chip exports and 16% increase in total shipments of cars. Exports to China and the United States rose 19% during the same period, while exports to the EU rose 16%. This trend is consistent with the ongoing bull market in the Korean stock market. Indeed, the KOSPI index rallied 45% in the last six months, led by Transport Equipment, up 92.2%. Sustained strength in the South Korean market is an encouraging signal for global growth.
In Brazil, the Central Bank held its benchmark policy interest rate unchanged at 2%. Policy makers warned that rising commodity prices is a headwind and the country still needs “an extraordinary high level of stimulus.” The Senate is willing to discuss a new round of economic stimulus although the spending cap will likely polarize the debate. President Jair Bolsonaro faces mounting pressure as protesters crowded the streets and called for his impeachment over his handling of the COVID-19 crisis. The Brazil IBOVESPA Index dropped 2.4% last week.
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