Markets End Week (Dec. 11) in the Red, Uncertain Short-term Sentiment

What Happened Last Week:

• Markets throughout the week continued wrestling with short-term pain and long-term optimism.
• After fresh record highs were reached the week before, the major indices ended the week lower due to a multitude of headwinds. Between Monday December 7th and Friday’s close December 11th, the Dow closed down 0.08%, the S&P closed down 0.77%, and the NASDAQ closed down -1.13%. The small-cap Russell 2000, however, notched another weekly gain, and closed up about 1.00%.
• Sentiment is mixed, and the rally since election week invokes concerns of overheating, with bad fundamentals. Commerce Street Capital CEO, Dory Wiley , advised caution. He pointed to 90% of stocks on the NYSE trading above their 200-day moving average as an indication that valuations might be stretched. “Timing the market is not always well-advised and paring back can miss out on some gains the next two months, but after such good returns in clearly a terrible fundamentals year, I think taking some profits and moving to cash, not bonds, makes some sense here,” he said.
• Judging by the jobless claims report which came in on Thursday (Dec. 10), the jobs recovery appears to have stalled. Weekly jobless claims increased by 853,000 last week versus the estimate of 730,000, representing a sharp increase from the 716,000 figure a week ago. This was also the highest number since September 19.
• Although the Senate unanimously passed a temporary spending bill to avoid a government shutdown and buy more time to negotiate a stimulus package before the end of the year, stimulus negotiations between Republicans and Democrats continue to drag-on and weigh on sentiment.
• The week before brought some initial signs of stimulus progress, however, Democrats and Republicans still have some critical differences. Much of the division stems from liability protections for businesses, the scope of state and local aid, and weekly unemployment benefits.
• It is possible that there could be a minor compromise reached before the end of the year, but a larger-scale comprehensive package may not be agreed upon until 2021. The longer these talks continue, the stronger the headwinds will be for stocks, and the more damaging it will be for the U.S. economy.
• DoorDash (DASH) and AirBnB (ABNB) both made their public debuts last week to much fanfare. Airbnb spiked 115% when it began trading publicly for the first time on Thursday (Dec. 10) while DoorDash closed 86% higher in its Wednesday debut (Dec. 9). However, according to Paul Schatz , president and chief investment officer of Heritage Capital, these debut rallies may indicate that the IPO market is getting ahead of itself, and invoke fears of “euphoria and greed” last seen in the market during the dot-com bubble.
• The pandemic continues exceeding the previous records. After hitting 3,000 deaths a day for several days last week, Friday’s (Dec. 11) tallies, according to NBC News , showed 2,890 deaths and 226,024 new cases.
• In the last week the U.S. has averaged 211,324 cases and 2,381 deaths per day, which is quite an increase from 168,493 cases and 1,419 deaths four weeks ago.
• Not all is bad, though. The vaccine(s) remain a positive tailwind. After the U.K. became the first country in the world to approve the usage of Pfizer and BioNTech’s vaccine the week before, the U.S. F.D.A. ended the week by officially clearing the vaccine for emergency use. Millions of doses are expected to be shipped right away.
• Since the vaccine was first announced on November 9, a broadening of the market’s rally began, largely led by small-cap stocks, and cyclical value stocks dependent on an economic recovery.
• Consumer sentiment posted a surprising increase in December due to vaccine optimism. Although the economic recovery may stutter in the near term, a vaccine changes everything for 2021’s outlook. Corporate profits, for example, are forecast to grow more than 20% in 2021 .
• According to Robert Dye, Comerica Bank Chief Economist , he is: “pretty bullish on the second half of next year, but the trouble is we have to get there…As we all know, we’re facing a lot of near-term risks. But I think when we get into the second half of next year, we get the vaccine behind us, we’ve got a lot of consumer optimism, business optimism coming up and a huge amount of pent-up demand to spend out with very low interest rates.”
• According to a JPMorgan note to clients released on Wednesday (Dec. 9), a widely available vaccine will lift stocks to new highs in 2021: “Equities are facing one of the best backdrops for sustained gains next year…We expect markets to be driven by recovery from the COVID-19 crisis at the back of highly effective vaccines and continued extraordinary monetary and fiscal support.”
• JPMorgan’s S&P 500 target for 2021 is 4,400. This implies a nearly 20% gain from where the index closed on Wednesday (Dec. 9).

In the short-term, there will be some optimistic days and pessimistic days. Other days, and in my opinion, which will be most trading days, markets will trade largely mixed, sideways, and reflect the uncertainty. However, if a stimulus deal passes before the end of the year, it could mean very good things for short-term market gains. It is possible that there could be a minor compromise reached before the end of the year, however, a more large-scale comprehensive package may not be agreed to until 2021.

In the mid-term and long-term, there is certainly a light at the end of the tunnel. Once this pandemic is finally brought under control and vaccines are mass deployed, volatility will stabilize, and optimism and relief will permeate the markets. Stocks especially dependent on a rapid recovery and reopening, such as small-caps, should thrive.

Due to this tug of war between sentiments, it is truly hard to say with conviction whether another crash or bear market will come.

Therefore, to sum it up:

While there is long-term optimism, there is short-term pessimism. A short-term correction is very possible. But it is hard to say with conviction that a big correction will happen.

Thank you for reading today’s free analysis. I encourage you to sign up for our daily newsletter – it’s absolutely free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Matthew Levy, CFA
Stock Trading Strategist
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Matthew Levy, CFA, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Levy is not a Registered Securities Advisor. By reading Matthew Levy, CFA’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading, and speculation in any financial markets may involve high risk of loss. Matthew Levy, CFA, Sunshine Profits’ employees, and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.