Stocks reached record highs again last week, despite the economy losing some momentum due to rising COVID-19 cases.

Impressively, all four major stock indexes rose to record highs on Friday, including the Dow Jones Industrial Average, S&P 500, Nasdaq Composite, and the small-cap Russell 2000. We view this broad participation of stocks as a positive signal after the market saw narrow Technology and Health Care leadership earlier in the pandemic.

We are now seeing new highs being reached by many deep cyclical stocks, including Industrial, Material, and Energy stocks. This suggests further increases in activity for these globally exposed and economically sensitive sectors, which bodes well for overall U.S. and global economic activity.

We also remain impressed by the rally in corporate bond prices—another positive participation signal. Even travel and leisure credits are rallying, which suggests a lower probability of default (relative to earlier in the pandemic) and implies future economic conditions should improve.

While the recent surge in COVID-19 infections is hampering economic activity for certain sectors of the economy, stocks remain focused on the positive vaccine news and the ultimate normalization of economic activity as we move through 2021. Meanwhile, the surge in new infections and slower economic momentum is creating a sense of urgency in Washington for the follow-on stimulus plan. There is now a greater probability that we will see a $900 billion plan that has bi-partisan support by the end of the year—rather than waiting until after Biden’s inauguration. This market-friendly stimulus plan would help bridge hard-hit economic sectors until the pandemic fades—supported by vaccines that will be fully rolled out in 2021.

Last week’s economic readings showed a further rebound in global economic activity led by manufacturing—despite the service sector being impacted by renewed restrictions due to the virus.

The November J.P. Morgan Global Manufacturing PMI (a timely and widely watched manufacturing business survey) showed global manufacturing output expand at the fastest pace since January 2018 and at one of the best growth rates over the past decade. Demand continued to revive following earlier COVID-19 lockdowns, including a further rebound in international trade flows. The survey also showed an increase in employment, as capacity constraints rose and business optimism hit a near six-year high—most likely helped by vaccine optimism. The U.S. and China continue to lead the improving manufacturing conditions.

We continue to follow China’s data closely and remain impressed. China is the second-largest economy in the world, was the first into the pandemic and the first to open, and its economic readings tend to lead the rest of the world. China’s manufacturing indicators are now stronger than they were in 2017/2018 which bodes well for the rest of the global economy. Importantly, emerging market stock indexes are making new cycle highs, while many commodity prices are breaking out to the upside, led by copper.

While manufacturing and China remain bright spots, the service sectors of the U.S. and Europe are seeing momentum slow as the surging virus causes renewed economic restrictions. This was evident in the ISM Non-Manufacturing Index which showed a slower pace of service sector growth. Friday’s employment report also showed job growth coming in below expectations with payrolls up by 245,000 while consensus was calling for 440,000. The surging virus and restrictions on economic activity should remain near-term headwinds for the service sector and employment growth.

However, given the strength and breadth of the stock and bond indexes, the promise of the vaccines, and the potential for additional stimulus sooner rather than later, we expect stocks to continue focusing on the reopening of the economy and the ultimate fading of the pandemic.

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