Stimulus Update From Yellen, China Growth News Help Ignite Rebound

 | Jan 19, 2021 10:49AM ET

The elephant in the room is tomorrow’s inauguration. Beyond that, there’s plenty going on this week, including a fresh batch of bank earnings and a FAANG sighting. But everything else could take a back seat to events in Washington as investors look ahead to big changes in policy and outlook from a new administration.

One of those policies could be more stimulus, which might partly explain why stocks surged in pre-market trading coming off of last week’s losses. With bank earnings in focus, it’s kind of interesting that the person likely to be their regulator in coming years appears in front of Congress today. Janet Yellen—President-elect Biden’s pick for Treasury secretary—has a confirmation hearing with the Senate Finance Committee. She’s expected to take a more hands-on approach than the current Treasury secretary, raising some concerns for both banks and insurance companies after they were allowed lots of flexibility the last four years.

Yellen will probably get asked about Biden’s stimulus plan and its potential impact on the national debt, according to media reports this morning. She might also be asked to discuss the dollar, which the current administration vocally tried to weaken at times. Yellen’s likely to say Biden’s administration will go back to more traditional methods of not talking down the currency, The Wall Street Journal reported. It’s possible this expectation could be playing into the dollar’s recent bounce off of nearly three-year lows.

Another item this morning is strong economic growth in China, and that’s apparently giving stocks some early support, too. You’ve got to put an asterisk next to any data from Beijing, but the numbers they released showed China’s economy accelerating into the end of the year. If that’s the case, it’s great news from a macro perspective.

h2 Bank of America, Goldman Sachs Go One For Two/h2

This morning’s big bank earnings batted .500, to borrow a baseball term. Meaning they arguably went one for two, though it wasn’t completely cut and dry. Bank of America (NYSE:BAC) shares ticked lower in the pre-market hours after disappointing investors with revenue below Wall Street’s expectations. But Goldman Sachs (NYSE:GS) hit a solid double, as trading results helped the company beat analysts’ earnings and revenue outlook.

The good news for BAC investors was the bank releasing some of the credit reserves it had built up in case of possible loan defaults and announcing a stock buyback plan. Still, the company came up short on trading revenue in Q4, mainly on the fixed income side. Trading wasn’t a problem for GS, however, as that part of the business blew through Street expectations. Uncertain times typically mean heavy trading volume and increased demand for investment banking services, which has helped both GS and JPMorgan (NYSE:JPM) over the last couple of quarters.

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The earnings action continues this afternoon when the first FAANG to report, Netflix (NASDAQ:NFLX), steps to the plate. After NFLX added more than 28.3 million new subscribers to an already hefty base in the first three quarters of 2020, analysts are anxious to hear how the streaming giant ended the year from a subscriber standpoint. Then Morgan Stanley (NYSE:MS) reports tomorrow morning.

We’re very early in the earnings season and so far things are moderate—not great but not bad. We’ll have a better idea about the lay of the land by the end of the week. One thing to keep in mind is that when a company beats on revenue, it can hide a lot of mistakes. So it’s important to look below the top line and check the quality of that revenue. When a company misses on revenue, it tends to get punished.

h2 Shades Of Halloween In January/h2

Major indices retreated last week for the first time since early December, with the S&P 500 falling into its worst slump going back to late October. Still, the index finished Friday down just 1.5% from the all-time intraday high of 3826 posted Jan. 7 and didn’t suffer too much from a chart perspective, so to speak.

Friday’s settlement of 3768 meant the SPX went home for the weekend without a drop below 3750, where many analysts see key technical support. A close beneath that could set up more selling, but “buying the dip” hasn’t lost its luster and can’t be ruled out on further declines, analysts say.

Many believe as long as the Fed remains dovish—and Fed Chairman Jerome Powell reinforced that in his remarks last week—the stock market might continue to find buyers on any pullbacks. Still, it’s definitely a change of pace to see the SPX slightly underwater year-to-date after the way it stormed back most of 2020 following all the craziness in February and March.

Another number to watch this week besides 3750 for the SPX is 1% for the 10-year Treasury yield. After scampering quickly from around 0.95% at the end of 2020 to nearly 1.19% at its peak last week, the yield quickly pulled back below 1.09% to finish things on Friday. Analysts said this could reflect consolidation after the initial rally went a bit too far, too fast, and that as long as the yield stays above 1% the uptrend could stay intact. That means 30-year mortgage rates could soon tick above 3%, housing market experts say. They were at around 2.9% as of the end of last week, still historically low.

More progress on the vaccine rollout and hopes for additional stimulus could give yields another chance to move higher, which could again pressure some of the large growth stocks that often catch a cold from higher rates. It sounds like the stimulus plan is going to be one of Biden’s first priorities, so investors are probably going to see very soon how that plays out in this closely divided new Congress.

h2 Small-Caps Keep Surging/h2

While the overall SPX had a week to forget, the sector scoreboard didn’t look all that bad. Only Communication Services really took a licking and that might be attributed to concerns about the social media space with the unsettled situation in Washington. Energy and Financials continued to lead the way as investors appear to be embracing companies that tend to do better during economic recoveries, and the small-cap Russell 2000 Index (RUT) also managed to keep its head above water. Small-cap stocks, banks and insurance companies, and oil and natural gas firms all could conceivably benefit if the country gets more stimulus. Crude stumbled Friday but remains near 11-month highs.

Despite last week’s downturn, some companies managed to enjoy decent gains. General Motors (NYSE:GM) is on a roll, helped by its growing profile in the electric vehicle space. Bed, Bath and Beyond (BBBY) surged amid management changes, and Tilray (NASDAQ:TLRY) has been smoking (sorry) thanks in part to hopes that Democratic control could help ease cannabis regulation, CNBC reported Friday.