Market Looks To Round Out 2020 In Quiet Fashion

Trading today might be like watching beige paint dry. But after a year like 2020, that may be just how some would like it.

As you might expect during a holiday-shortened week, trading volumes in stocks in each of the three main U.S. indices were lower than average yesterday. That might also be the case today as it’s the last trading day of the year and many investors and traders have likely closed the books on 2020.

There’s also not too much on the economic calendar aside from this morning’s initial jobless claims figures, which came in at 787,000 compared with a Briefing.com consensus expectation of 800,000.

This closely-watched number has stubbornly stayed above 800,000 in recent weeks, so the better-than-forecast data is a welcome improvement. But the weekly number is still much higher than in pre-pandemic days and serves as a reminder that the economy seems far from out of the woods as widespread vaccinations appear to be a long way off.

New Vaccine Gives Market Shot In The Arm/h2

There was some good news on the vaccine front yesterday, as a British regulator gave the go-ahead for emergency use of a vaccine from the University of Oxford and AstraZeneca (NASDAQ:AZN).

With that vaccine joining ones made by Moderna (NASDAQ:MRNA), and Pfizer (NYSE:PFE)/BioNTech (NASDAQ:BNTX), as well as those made in Russia and China, investors seem to have been gaining more confidence that the vaccination programs will end up curbing the pandemic enough to eventually allow businesses to perhaps reopen to pre-COVID levels. In the meantime, however, the world must deal with a resurgence in case counts and hospitalizations.

In other words, the market seems to be more focused on the future than the present. With that backdrop, the Energy and Materials sectors were the best performing on Wednesday, indicating that investors may have been moving some money into cyclical stocks that would stand to benefit from a reopening economy.

Despite the wrangling over raising the amount of congressional stimulus, the market still seems to be somewhat buoyed by the previously announced $600 direct payments, which the government has already started distributing.

Limping To Finish Line...But Still Making Records/h2

Still, even though the Dow Jones Industrial Average closed at a record, the market’s gains on Wednesday weren’t huge.

That could be reflective of market participants looking for another catalyst to meaningfully move stocks higher given that much vaccine optimism has already been priced in, as have the $600 stimulus checks.

Remember: The markets are closed tomorrow for New Year’s Day, but today will be a full session. Weekly options expire today. If the news flow is quiet today, it’s possible that with holiday-thinned volumes, traders and investors might just coast through the last trading day of what has been a tumultuous 2020. Many traders and money managers tend to head for the exit door this time of year, reluctant to take on any new positions.

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But holiday markets can be a double-edged sword. If there’s any news on the stimulus or virus fronts (or any of the themes we identified in our 2021 Outlook ), the market could become extra choppy. Also, it’s worth remembering that the last hour of today’s session could see some extra movement as some market participants may use that time to do some last minute squaring up of positions.

After pausing to celebrate the new year, we jump right back on the treadmill next week. The Georgia runoff elections are likely to be closely watched by investors. And we’re also scheduled to get a smattering of economic data including a closely watched manufacturing index, weekly jobless claims, and the big event of the week—the nonfarm payrolls report on Friday.

As this year comes to a close, we’d like to wish you a happy and, especially, healthy new year.

CHART OF THE DAY: VOLATILE CRYPTO. Since their launch a couple years ago, bitcoin futures (/BTC–candlestick) have gone from boom to bust, to re-boom, to parabolic in recent days. Relative to classic methods of payment such as the dollar ($DXY–blue line) and inflation hedges such as gold (/GC–purple line), bitcoin has seen more than its share of volatility. Data sources: CME Group (NASDAQ:CME), ICE (NYSE:ICE). Chart source: The thinkorswim® platform from TD Ameritrade (NASDAQ:AMTD) . For illustrative purposes only. Past performance does not guarantee future results.

Is inflation headed our way? Nobel Prize-winning economist Paul Samuelson once quipped that the stock market had predicted “nine of the last five recessions”—a way of saying the market isn’t a perfect barometer of what’s to come. That’s worth keeping in mind when looking at the recent advance in the price of bitcoin futures (/BTC—see chart above). When you think about recent comments from the Fed about keeping rates low for an extended period and potentially letting inflation run hot—along with fresh fiscal stimulus and suggestions of more to come—it’s tempting to look at /BTC as a possible harbinger of coming inflation.

But pull up a gold chart from the financial crisis in 2008 through 2013 and you might see the same dynamic—the flood of liquidity was supposed to usher in a new era of inflation. But it didn’t play out that way. Inflation lagged, despite record low unemployment, and gold spent the middle of the last decade giving back much of those gains from 2008-2013. Gold—like bitcoin—has had a recent resurgence, but it’s tough to say whether inflation is just around the corner this time, or if it’s another one of those Paul Samuelson-type false alarms.

2021 and 4080: On Tuesday the SPX notched a new record high above 3750, an indication that the forward-looking stock market is continuing to price a better 2021. But could valuations be a little overdone? Investment research firm CFRA has a 12-month price target for the SPX of 4080, which implies a 9.5% gain from Tuesday’s close. That forecast comes as 2021 global gross domestic product estimates are around 5% for developed and emerging markets, and earnings per share forecasts are well into the double digits for the United States, emerging markets, and developed international markets. But there seem to be signs that caution might be in order. “Domestic equity markets appear to us to have over-discounted a second-half 2021 economic and EPS recovery … and as a result may be vulnerable to a Q1 pullback,” CFRA said. The group noted that the Russell 2000 was more than 30% above its 200-day moving average, and the SPX’s next-12-month price-to-earnings ratio was 42% higher than the 20-year average.

Energy Energized: It seems that oil prices have some tailwinds that could help keep the Energy sector recovery on track. A weaker dollar is helping boost demand for dollar-denominated crude from buyers using other currencies. Meanwhile, another coronavirus vaccine could help get the global economy on its feet and help increase demand for crude. Domestically, the U.S. economy, and thus demand for oil, could be aided by congressional stimulus. And in the short term, an American Petroleum Institute report showing a bigger-than-expected weekly crude inventory draw has helped boost domestic crude futures. However, it’s worth keeping in mind that the Energy sector is by far the worst-performing of the year, having slid more than 36% in the year through Wednesday’s close, and the global economy seems far from out of the woods as vaccine rollouts are only just beginning.

Written By: JJ Kinahan