While the number of COVID-19 cases continues to rise and remains a concern, the S&P 500 stock index gained 2.2% to an all-time high last week.

Stocks that benefit from the economic reopening got a major boost from Pfizer’s positive Phase 3 trial data, which showed their vaccine to be more than 90% effective. This was followed today by similar very positive news from Moderna’s vaccine trial which showed more than 94% effectiveness.

These results suggest a vaccine should be widely available by mid-2021 that is to the benefit of industries hardest hit by the pandemic. As a result, investors shifted out of Technology and growth stocks (pandemic beneficiaries) and into more economically sensitive areas with Energy, Financials, Industrials, and Real Estate sectors all outperforming last week.

While the fundamentals for Technology and other growth stocks (primarily Health Care) remain solid, the more economically sensitive and pandemic hit sectors should continue to benefit as the market ultimately looks toward a post-pandemic economy.

Meanwhile, the incoming economic readings continue to show improvement, despite delays in the follow-on stimulus plan and the still uncertain final makeup of the Senate as we await the January 5th Georgia run-offs. Third-quarter corporate profits came in much better than expected, which is also supporting stock prices. We expect these improvements in economic readings and profits (ultimately bolstered by the follow-on stimulus plan and a vaccine) to support stocks as we move into 2021.

Encouraged by Improving Leading Indicators and Labor Markets

Last week’s release of the OECD U.S. Composite Leading Indicator showed its sixth straight gain to the best level since February—suggesting the outlook for broad economic growth is improving. The October NFIB Small Business Optimism Index remained steady at its best reading since February, despite presidential election and pandemic concerns.

While there is much work to be done, labor markets continue to heal from the hard lockdowns of the spring. The number of job openings increased to 6.4 million (up in four of the last five months) while the number of unemployed per job opening continues to fall and is now down to 1.96 (after peaking at 4.5 earlier this year). Initial and continuing jobless claims, while still elevated, continue to move lower too.

The Consumer Price Index came in below expectations at just a 1.2% year/year increase and below the Federal Reserve’s 2.0% target. These low inflation readings are important because they allow the Federal Reserve to run an easy monetary policy which is favorable for the economy and stocks.

Encouraged by Earnings Season

While all eyes were on the election and vaccine news, third-quarter earnings season showed stellar results. Sixty-seven percent (67%) of S&P 500 firms beat their earnings estimates, the highest on record. While the consensus expected S&P 500 earnings per share to fall by 21% year/year, they only fell 8%, primarily due to resilient profit margins. S&P earnings per share are now just 7% below their pre-COVID level, exhibiting an unprecedented V-shape recovery.

Profitability is not only the most important support for stock prices, but also important for capital spending and employment. Positive developments on these fronts are needed for the sustainable economic expansion that we believe has begun.

Encouraged by International Stock Markets

While European economies are struggling with high COVID-19 infection rates, their stock markets also rallied last week. Stocks are an important leading indicator and European markets are looking past the fourth quarter’s lockdown weakness toward a vaccine and stimulus-supported recovery in 2021. In addition, Japan’s Nikkei stock index hit its highest level in nearly 30 years last week. China, which was first-in and first-out of an economic lockdown, continues to show improvement as evidenced by last week’s positive OECD China Composite Leading Indicator.

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