Weekly Market Update - January 15, 2021

Small-Caps rise and the Large-Caps fail as Wall Street seems unimpressed with the proposed 1.9 trillion stimulus bill.

• Small-caps continued to outpace the larger-caps during the second full week of 2021, as the small-cap Russell 2000 was the only major U.S. equity index recording positive gains as it moved up 1.5% on the week

• The other major U.S. indices retreated on the week, with the DJIA dropping 0.9% and the S&P 500 and NASDAQ both giving up 1.5%

• On the bright side, before the pull-back toward the end of the week, the DJIA and NASDAQ both crested new highs

• The Energy sector has had a wild start to 2021 as it’s up over 12% for the year, gained 3% this week alone and dropped 4% just on Friday

• Of the 11 S&P 500 sectors, 6 of them ended the week in positive territory, led by the Energy sector as the Communications Services sector brought up the rear

• The Q4 Earnings season is upon us and the big banks kicked it off with Citigroup, JPMorgan Chase and Wells Fargo all reporting better than expected results

• The Consumer Price Index rose for the month of December by 0.4%, after rising half that amount in November

• Volatility, as measured by the VIX, crept back into the market but stayed with a range of 22 – 25 before settling the week just a little lower than it started

• WTI Crude ended the week at $52.36/barrel, virtually unchanged on the week

Small-Caps Lead the Way as Other U.S. Markets Retreat

The major large-cap U.S. benchmarks and the large-cap developed international markets benchmark finished the week lower, with most of the declines happening toward the end of the week. The small-cap Russell 2000, on the other hand, moved up 1.5% as it continues to outpace its larger-cap cousins by a healthy margin so far in 2021. Further, the value names outpaced the growth names for the second week in a row.

The Energy sector was leading the market and helped propel the S&P 500 to a new intraday high on Thursday, but then hit a wall on Friday and dropped 4% on the last trading day of the week. The Communication Services sector underperformed significantly, mostly pulled down by Twitter and Facebook, as investors worried after the two banned President Trump from their platforms indefinitely.

The political situation in Washington D.C. dominated Wall Street’s sentiment all week, as traders were trying to determine the impact a second impeachment vote might have immediately as well as near-term, specifically with respect to how it might hamper the efforts of the new Biden administration and Democrat-controlled Congress.

Mid-week, markets seemed to respond well to the notion of another stimulus package, but after more details were revealed late on Thursday, markets appeared less impressed. Yes, the package is valued at $1.9 trillion and calls for another round of stimulus checks to individuals, but Wall Street is questioning just how much might actually get approved given the contentiousness that abounds within Congress.

Q4 Earnings Season Kicks-Off

Before markets opened on Friday, the big banks kicked off earnings season as JPMorgan Chase, Citigroup, and Wells Fargo all reported fourth-quarter results beyond expectations. Despite such numbers, all three fell as trading opened.

When markets closed on Friday, research firm FactSet reported that polled analysts were expecting a decline in overall earnings for the S&P 500 to be 6.8% on a year-over-year basis. If that number holds, it would be the fourth worst quarterly decline in the past 10 years. The good news is that the prediction for a 6.8% decline in Q4 earnings is better than the predicted 9.2% decline from just a few weeks ago.

Bad Economic News

Many on Wall Street were focused on some pretty bad economic data received late in the week:

• Retail sales dropped 0.7% in December, much more than anticipated and the third consecutive monthly decline

• Broad-based sales (excluding autos) was apparently not due to COVID-restrictions and was very much felt online

• Weekly jobless claims hit 965,000, the highest level since mid-August

In addition, there are some worried that inflation might be creeping up.

Consumer Price Index (Inflation) Rises in December

On Wednesday, it was reported that the Consumer Price Index for All Urban Consumers increased 0.4%, after rising half of that (0.2%) in November.

Further, from the BLS press release:

• Over the last 12 months, the all items index increased 1.4% before seasonal adjustment.

• The seasonally adjusted increase in the all items index was driven by an 8.4% increase in the gasoline index, which accounted for more than 60% of the overall increase.

• The food index rose in December, as both the food at home and the food away from home indexes increased 0.4%.

• The index for all items minus food and energy increased 0.1% in December.

Further, the indexes for apparel, motor vehicle insurance, new vehicles, personal care, and household furnishings and operations all rose in December. The indexes for used cars and trucks, recreation, and medical care were among those to decline over the month.

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Sources:bls.gov;msci.com; factset.com; fidelity.com; Nasdaq.com; wsj.com; Morningstar.com

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