On Your Mark

Trading volume last week was, not unexpectedly, very light. All three major U.S. equity market indices remained in-trend – closing out the holiday shortened week marginally higher. On Thursday, the Dow Industrials and S&P 500 both closed at all-time highs on the last trading day of the year while the Nasdaq Composite closed within 1% of its all-time high. All three major market indices naturally also ended the week well above their respective 21 DMA, 50 DMA, 200 DMA, and in a “Confirmed Uptrend.” The Nasdaq Composite posted its best one-year performance since 2009.

On the year, the Nasdaq was the best performing major market index here in the U.S. and around the industrialized world, gaining 3915.68 points or 43.64%. The S&P 500 gained a healthy 525.29 points or 16.26% and the Dow Industrials added a more modest 2068 points or 7.25% in 2020. Considering the very significant and complex challenges that emerged in 2020, the full-year performances by U.S. equity markets was very impressive.

When compared with major international market indices in 2020, particularly those representing industrialized economies, U.S. equity markets did exceptionally well. Of the five major equity market indices that comprise the European, Middle Eastern, and African region, according to Bloomberg, only one showed positive gains, Germany’s DAX. It rose a scant 3.55%. The Asian Pacific region’s equity market indices outperformed the aforementioned region significantly. The NIKKEI 225 rose 16.01%. The TOPIX Index rose 4.84%. The HANG SENG Index lost 3.40% while the CSI 300 Index led the region with a gain of 27.21%. Finally, the S&P/ASX 200 Index lost 1.45% and the MSCI AC ASIA Pacific gained 17.1%. In short, the NASDAQ Composite was by far the best performing major market index in the industrialized world.

If in 2020 you were a stock picker, with tremendous confidence and intestinal fortitude and who remained long the market, who had exposure to the Nasdaq composite and were long some of the best performers on the year, you could easily have doubled your equity portfolio’s value in 2020. And if you have been reading this note over that period, there is a very good chance you had a great year – at least in terms of portfolio gains.

We begin 2021 trading in a “Confirmed Uptrend” with 2020 Q4 results just around the corner. As is always the case, financials will be leading the earnings charge which begins in a little over a week. Financials have a unique purview into the health of the economy, and their results are combed over fastidiously – often times setting the tone for earnings season. I expect markets to continue to drift higher in Q1 though the exhausting, and all too often fatal, COVID-19 narrative will continue to deliver plenty of head fakes for those trading off the headlines rather than remaining focused on earnings and economic data. Is it possible we see a 5%-10% pullback materialize at some point in the coming weeks? Absolutely. I called for that several weeks ago in my reference to a “reversion to the mean trade.” Several variables could act as a trigger for that potentially short-lived test or reset for equity markets:

-Georgia’s senatorial run-off elections could deliver Democratic control over both houses of Congress and the White House. Would that be a positive or a negative and how would Wall Street react if at all? Wall Street tends to value a divided Washington D.C..

-An unexpected earnings miss coupled with guidance that delivers on a narrative not currently priced into the market. Though earnings and corporate guidance tend to ride rails of relative certainty, there is no guarantee that there won’t be an unexpected miss coupled with guidance that upends a vertical of the market that causes significant volatility – effectively upending the apple cart.

-What happens to markets and our fragile social fabric if President Trump does not concede? How would markets react to that if at all? Markets don’t value uncertainty.

-Are there Geo-political events in the offing, yet to unfold, that could potentially take global markets off guard? Often times these tend to emerge when investors are seemingly least prepared.

Irrespective of the variables that may or may not emerge in coming days and weeks, as it stands right now, even if a pull-back does materialize, the longer-term trend will remain higher, and once again, stock pickers will be handsomely rewarded with outperformance versus the major market indices, domestic and international, in 2021. Excessive liquidity, an aggressively accommodative Fed, interest rates at or close to zero, a weaker US dollar, vaccination roll-out, herd immunity, improving consumer confidence will provide a supportive narrative for equity markets and for incoming President-elect Joseph Biden.

My 12-month targets:

DJIA: 36,727/12%
S&P 500: 4,131/10%
NASDAQ: 15,464/20%


Last Week’s Economic Calendar Highlights:

Last week’s economic calendar was light in terms of market-moving data. On Wednesday morning we received the advance reading of International Trade in Goods data for November. The advance trade gap in goods expanded to $-84.8 B from October’s reading of $-80.4 B. Not only did we see the gap widened versus the previous month, but it was also substantially worse than the Econoday consensus of $-82.0 B. Also on Wednesday, the EIA Petroleum Status Report for the week ending 12/15 was released. Crude oil inventories shrank by 6.1 M barrels. Gasoline inventories slipped a more modest 1.2 M barrels and distillate inventories rose 3.1 M barrels. Weekly Jobless Claims for the week ending 12/26 were modestly better than expected. Initial claims – Level were 787 K versus the previous revised reading of 806 K. However, the 4-week moving average rose to 836.75 K due to disappointing results over the previous several weeks.

This Week’s Economic Calendar Highlights:

The ISM Manufacturing Index for December is due out on Tuesday, mid-morning. Econoday consensus is 56.5 versus the prior month’s reading of 57.5. On Wednesday we receive the EIA Petroleum Status report for the week ending 1/1/21. We also receive the FOMC Minutes from the FOMC Meeting held three weeks ago. Given the strident efforts being made by the Fed to instill confidence, provide transparency, insure stability, and remain proactive from a monetary policy stand point, there is little likely to be released in the FOMC Minutes that should come as a surprise. International Trade figures in Goods and Services for November are expected to widen marginally to $-64.2 B. Weekly Jobless Claims are expected to rise sharply to over 850 K from the previous weekly reading of 787 K. The last Monthly Employment Report of the year, for December, is set for release on Friday morning at 8:30 am. The topline unemployment rate is expected to tick up to 6.8% from 6.7%. Though gains are still expected for the month of December, they are expected to have reversed sharply in the post-holiday timeframe into year-end. Econoday consensus is looking for nearly every metric of measure in the report to reflect a modest slowing in recent employment report gains.

Flickr photo: Ron F✿urie

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