North American markets today, Friday, viewed several hours before opening, appear poised for a positive start, with major indicators in the green at time of writing. However, the S&P 500 is somewhat ‘nervously’ moving up and down in a narrow band and it is within the realm of possibility that it could slip into the red during the trading day.
European markets are open at time of writing and major indicators there are also in the green at time of writing. However, like so many other factors in today’s market environment, that is changeable. The DAX moved back and forth between green and red even while I was assembling this column.
That follows yesterday’s market action which saw the NASDAQ Composite closing at a record high. Not surprisingly TESLA Inc. surged after Goldman Sachs published a ‘Buy’ rating as the iconic electric carmaker approaches its entry into the S&P 500 index. Reflecting both of those factors, TESLA was the most traded stock by value with $25 billion worth of shares exchanged, according to a Reuters report. It closed at $593.38, up a heart-numbing $24.56 on the day.
Meanwhile, in a surprise, the S&P 500 fell yesterday, with the drop partially triggered by reports that Pfizer Inc. may have supply chain problems. In the midst of all of the vaccine news, Pfizer closed at $40.09, down $0.71 on the day.
Generally, vaccines and vaccine news are driving the market this week, but with some nervousness. “We’re in a year-end Santa rally, but it’s going to be a muted one,” explains Peter Cardillo, chief economist at Spartan Capital Securities in New York, in the same Reuters report. “Stimulus hopes are back in the market and it looks like we might get something before year-end, which the economy desperately needs.”
Saying for the moment that Cardillo has it right and that Washington manages to approve a stimulus plan by the end of the year, it will inject confidence into the muted Santa rally and combine with the vaccine-induced confidence.
A long list of factors currently operating in the investment environment will affect some portfolios some of the time in the coming months. I’m listing some here and will cover others next week
The implications of the need for a stimulus plan are enormous both for ravaged businesses and the huge number of furloughed and fired employees, many of whom have no immediate hope of getting their jobs back. A well-funded and executed plan would go at least part way towards repairing the economic damage of the pandemic.
Another certainty to be considered is rock-bottom interest rates which are going to be with us for some time. The United States Federal Reserve Board and Chairman Jerome Powell have vowed to keep rates down until at least 2023 – which is really just slightly more than a year away. Other central banks have made similar promises. That being the case, huge amounts of cash that would normally go into interest-bearing assets will either go into the market, driving up some share prices, or sit on the sidelines.
Market volatility will be another factor until well into 2021 but there is no apparent threat of a market crash at this time. The pattern of rallies and pullbacks will continue, explains Drummond Brodeur, Senior Vice President and Global Strategist at Signature Global Asset Management, a division of CI Global Investments Inc.
Stated more simply, the stomach-churning volatility will continue at least until well into 2021.
According to Brodeur’s analysis we will see ongoing economic recovery and reopening assisted by improved COVID-19 treatments and vaccines. At the same time, monetary policy will remain accommodative with flexible financial conditions.
Brodeur argues that the accommodative monetary policy, those conditions, an improving economy bringing with it rising earnings, healthy capital markets and the ever-vigilant Federal Reserve are not conditions that would lead to a crash, though we can expect pullbacks.
A major engine of growth remains healthy but with some limits. The housing trend is slowing, according to an analysis prepared by Paul DeSisto, CFA, Executive Vice President at M & R Capital in Summit, New Jersey. DeSisto points out that sales of previously owned homes fell for a second straight month in October, signaling that the housing boom seen throughout the pandemic may be slowing. However, it is not halting. J.P. Morgan has stated that” … the recent cooling in the pending home sales data has reversed only a small portion of the surge reported over the prior few months.”
Put differently, the slowing has not made a serious difference.
DeSisto says that four homebuilding stocks merit consideration: NVR Inc., Pultegroup Inc., LGI Homes Inc and D. R. Horton Inc.
This just a partial list of factors affecting the market now and likely to continue into 2021. I’ll discuss others next week.
Disclosure: I do not own any shares in any company mentioned in this report.