Stocks started the new year on an optimistic note with the S&P 500, Dow Jones Industrials, Nasdaq Composite, and the small-cap Russell 2000 all making record highs last week.
The results of Georgia’s Senate runoff elections helped fuel the rally, as it implies more stimulus will be coming. Democrats now control the White House and both chambers of Congress for the first time since the party lost the 2010 midterms during
President Barack Obama’s first term.
Biden and the Democrats will initially focus on economic recovery from the pandemic and control of the Senate will allow for additional fiscal spending. This should enhance the recovery that was set to benefit from the recently passed $900 billion stimulus plan. There is also a decent chance we will see an infrastructure plan from Biden and the Democrats that would also help economic growth and potentially longer-term productivity.
We continue to see leadership coming from sectors that benefit the most from vaccines and economic reopening. Energy, Materials, Financials, and Consumer Discretionary—cyclical economic sectors that benefit from healthy economic growth—are encouragingly leading market gains as we start the year.
Labor Market Reflects Virus Headwinds
While nonfarm payrolls contracted by 140,000 in December, the losses were concentrated in leisure and hospitality, which
lost 498,000 jobs, mostly at restaurants and bars, reflecting the impact of renewed partial shutdowns to control the surging virus. Outside of this sector, employment actually rose 358,000 with the data showing the majority of industries were hiring.
We continue to see strong hiring in important economic sectors including Technology, Manufacturing, Health Care, and housing-related. These sectors are playing a critical role in shaping the future of the economy. As the vaccine is rolled out, the COVID-19-hit industries will also see improvement and benefit from significant pent-up demand fueled by currently high consumer savings.
Business Surveys Remain Encouraging
The business surveys continued
to show an economic recovery in December, despite the renewed partial lockdowns to combat the surging virus. The ISM Manufacturing Index reached its highest level since August 2018, as factory activity strengthened at year-end. This survey has been
in expansion territory since June, following a severe contraction in the prior three months due to the COVID-19 lockdowns and recession. The current index level implies above-trend manufacturing output growth, and is consistent with continued economic
The ISM Non-Manufacturing Index reached a three-month high suggesting a strengthening of services activity at year-end. The combined survey readings suggest that the economic recovery continued in the fourth quarter, despite the renewed surge in COVID-19 cases, partial lockdowns in many states, and waning fiscal stimulus (before the approval of the latest $900 billion COVID-19 relief bill on December 27). Corporate profits are also correlated with the business surveys, so healthy surveys imply strong fourth-quarter profits.
Global Backdrop Remains Encouraging
The rate of global economic expansion remained solid at the end of 2020 with the J.P. Morgan Global Composite Output Index
remaining close to October’s two-year high. Five out of six sub-industries covered by the survey registered increased output in December.
Economic output expanded in the U.S., China, Germany, India, the UK, Brazil, Australia and Ireland, with the strongest growth registered by Australia, China and the U.S. Contractions were seen in the euro area (on average), Japan, and Russia.
Earnings season kicks off this week with three of the four-largest U.S. banks reporting fourth-quarter results on Friday. The major banks always provide insightful information on many sectors of the economy, which is very helpful during this uncertain time.
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