Positive Vaccine News Pushes Equity Markets Mostly Higher As Sector Rotations Are Starting To Take Shape
• It was another big week for U.S. stock markets, although the tech-laden NASDAQ did not participate in the jumps as much as the other U.S. equity markets
• The small-cap Russell jumped 6.1% this week, which is on the heels of last week’s 6%+ gain, while the DJIA moved up 4.1% and the S&P 500 added 2.2%
• NASDAQ dropped 0.6% on the week as further evidence that a cyclical rotation out of tech names is occurring, but two weeks does not necessarily make a trend
• Last week saw the markets record their biggest gains since April and this week that rally continued as Wall Street remained hopeful that news about potential vaccines being available this year gave the markets reason to cheer
• Nine of the 11 S&P 500 sectors closed in positive territory and the Energy sector saw a whopping 16.5% gain on the week, almost double the returns of the Financials sector, which gained 8.3%
• Consumer Discretionary and Information Technology ended the week red, dropping 1.1% and 0.4%, respectively
• Volatility was stable from the beginning to the end of the week, although there were spikes on Tuesday and Friday mornings
• WTI Crude ended last Friday around $37/barrel and ended this Friday at about $40/barrel
• The 10-year Treasury yield ended the week at 0.89%
Stocks Rise Again on News of a Vaccine
With the exception of NASDAQ, which declined slightly on the week, the other major U.S. market benchmarks rose significantly for the second week in a row. The small-cap Russell 2000 leapt 6%, on the heels of last week’s 6%+ gain and the 4%+ gain for the DJIA put it within shouting distance of that ceremonial 30,000-point threshold.
All of the major indexes hit all-time intraday highs early Monday morning, but then gave back many of the gains before moving up again sharply to end the week. Even the international, developed markets as represented by MSCI EAFE had a big week, gaining over 4% and within 200 basis points of being positive YTD.
To underscore the rotation that has been occurring recently, it was the concentrated-30-stock DJIA and smaller-caps outperforming whereas NASDAQ – and the large tech names – were surrendering some gains.
To really underscore the point, just look at how well the Energy sector performed on the week versus the Information Technology sector: a 16% gain to a 1% loss. And finally, it was the value names that outpaced their growth counterparts.
From an economic data perspective, the picture was mixed. Small businesses reported feeling more optimistic, weekly jobless claims fell more than expected and continuing claims dropped below 7 million. Further, CPI data seemed to suggest that inflation was less of a worry too. All that being said, the University of Michigan’s measure of consumer sentiment in November was worse than expected and dropped to a three-month low.
The news of the week – besides the media calling the 2020 presidential race for former Vice President Joe Biden – was when Pfizer announced that their vaccine was over 90% effective in preventing infections in trials and that production and delivery could ramp up by year’s end.
Inflation Relatively Unchanged
At the end of the week, the Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers was unchanged in October on a seasonally adjusted basis after rising 0.2 percent in September. Over the last 12 months, the all items index increased 1.2 percent before seasonal adjustment.
From the BLS release:
• Component indexes were mixed, with many offsetting increases and decreases.
• The food index rose 0.2 percent, with the food away from home index increasing by 0.3 percent and a smaller 0.1-percent rise in the food at home index.
• The energy index rose 0.1 percent in October as the index for electricity increased 1.2 percent.
• The index for shelter increased 0.1 percent in October, which was offset by a 0.4-percent decrease in the index for medical care.
• The indexes for airline fares, recreation, and new vehicles were among those to rise, while the indexes for motor vehicle insurance, apparel, and household furnishings and operations declined.
The National Federation of Independent Business released their Small Business Economic Trends data on November 11th and reported that:
“The NFIB Optimism Index remained at 104.0 in October, unchanged from September and a historically high reading. Four of the 10 components improved, 5 declined, and 1 was unchanged. Although all of the data was collected prior to Election Day, a 6-point increase in the NFIB Uncertainty Index to 98 was likely driven by the election and uncertain conditions in future months due to the COVID-19 pandemic and possible government-mandated shutdowns. The uncertainty reading was the highest reading since November 2016.”
Further, the NFIB found the following trends:
• Earnings trends over the past three months improved 9 points to a net negative 3% reporting higher earnings.
• Earnings trends have improved to pre-crisis levels, up 32 points since June.
• Real sales expectations in the next three months increased 3 points to a net 11% expecting gains.
• Owners expecting better business conditions over the next 6 months declined 5 points to a net 27%.
Small Businesses Looking to Hire
As reported the week prior in the NFIB monthly jobs report, small business owners are looking to hire, reporting a historically high level of job openings in October, including that:
• 55% of owners reported hiring or trying to hire in October, down 1 point from September.
• 33% percent of all owners reported job openings they could not fill in the current period, down 3 points from September’s report.
• 23% reported raising compensation and 18% plan to do so in the coming months, up 2 points.
• 8% cited labor costs as their top business problem (down 1 point) but 22% said that labor quality was their top business problem, exceeding taxes, regulations, and weak sales.
• 35% in construction report finding qualified workers as their top issue, slowing new home production.
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Sources: ;bls.gov; nfib.org; msci.com; factset.com; fidelity.com; Nasdaq.com; wsj.com; Morningstar.com