It was a wild week on many fronts, but stocks shook off most negative headlines as the S&P 500 logged a gain of 1.9% to close at new highs around 3825 Friday (see footnote). The tech-heavy Nasdaq and small-cap focused Russell 2000 were the standouts however, with gains of 2.5% and 5.9% respectively. Last week was the best start to a new year for the Russell 2000 since 1987. Perhaps some of the optimism was fueled by better than expected reports on the health of the U.S. manufacturing and services sectors. The ISM Manufacturing Index report showed a surge in activity, pushing the index to its highest level since August of 2018 for the month of December (see footnote). The ISM Non-Manufacturing survey rose to a 3-month high in December as well, with 14 of the 18 industries reporting growth1. It was a different story in fixed income markets, however, as rates rose across the Treasury curve from 5-year to 30-year maturities in anticipation of more fiscal stimulus given the Democrat sweep in the Georgia Senate races. The 10-year Treasury yield jumped 20 basis points from 0.93% at the start the week to 1.13% at the close Friday, which resulted in a loss of -0.84% for the Bloomberg Barclays Aggregate Bond Index for the week (see footnote). With rates moving higher on stimulus talks, the US Dollar spot rate appreciated about 0.65% last week (see footnote).
Beneath the surface of the market moves lay a highly emotional week for our country. The Democrat sweep in the Georgia Senate races came as a surprise, generally given polling going in, and we learned Friday that labor market pains are again being felt with the December jobs report showing that payrolls dropped by 140,000 versus a consensus estimate of a 50,000 gain (see footnote). This was the first drop in payrolls since April and leaves the country with a jobs deficit of around 10 million compared to pre-pandemic levels (see footnote). The jobs report outcome is of course a direct result of the huge surge in the coronavirus globally, which is severely straining hospital system capacity.
Our hope is that our nation can begin the process of moving forward in the new year. Clearly, risk assets have responded positively to the potential for more stimulus and faster economic growth as more people are vaccinated. The results of the Senate races likely solidify significant amounts of future fiscal stimulus from Washington. We wouldn’t be surprised if another $1 trillion package (or more) isn’t laid out in short order. This may give further support for risk assets in the nearer term. However, the Georgia Congressional races also likely indicate some level of increased tax rates and regulation down the road. These are issues we will be digging into as the Biden Administration takes office and begins to clarify specific policy intentions. For now, we should enjoy the ride of the stock market. It may, however, get a bit bumpier as we progress further into Q1, which should not surprise investors given recent strong gains should it happen.
The Week Ahead:
Politics in Washington will clearly be a feature of the week ahead, but hopefully attention can start to turn to more fundamental measures like earnings. This week will be the start to an important earnings season with the big banks in focus as JP Morgan, Wells Fargo, Citigroup and PNC all report. Releases from Taiwan Semiconductor, BlackRock and Delta Airlines will also be closely watched by market participants. Economic data this week will feature the NFIB Small Business Optimism report which will be closely monitored given the significant surge in small-cap stocks over the last several weeks. We will also get several key inflation data points that will be important given some of the demand and supply issues pointed out in the ISM Manufacturing report last week. We’ll close out the week Friday with a look at Industrial Production and Capacity Utilization for December as well as a preliminary look at consumer attitudes at year end in the University of Michigan Consumer Comfort Index.
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