Market Perspective for December 20, 2020

Markets declined on Friday, even though the Nasdaq and the Dow managed to hit new intraday trading records. The S&P 500 declined 0.35 percent, but the much-anticipated addition of Tesla (TSLA) to the index is a potentially positive market mover. Tesla will account for approximately 1.5 percent of the S&P 500 Index.

Similarly, the Dow dropped 0.40 percent. The Nasdaq slipped 0.07 percent. The Russell 2000 Index wrapped up the trading day on Friday with a loss of 0.41 percent. Even with the dip on Friday, there was still positive movement for all over the week. The Nasdaq increased 3.05 percent on the week, while the Dow gained 0.44 percent. and the S&P 500 rose 1.25 percent. The Russell 2000 gained 3.05 percent.

SPDR Technology (XLK) gained 3.19 percent last week as the technology sector outperformed its competitors. SPDR Consumer Discretionary ETF (XLY) increase of 2.36 percent. SPDR Materials (XLB) returned 1.83 percent.

Gas prices per gallon were up on Friday by 0.22 percent to $2.71 per gallon. Crude oil fell by 0.04 percent to $49.08 per barrel. SPDR Energy (XLE) slipped 4.18 percent. Over the past two months, the fund has risen 30.55 percent.

On Thursday, the FDA’s advisory panel recommended emergency use approval for Moderna’s (MRNA) vaccine. Modern shares dipped slightly overnight on the release of this announcement. This marks the second coronavirus vaccine option to be recommended by the FDA after Pfizer’s (PFE) vaccine was also approved earlier this month.

The economy remained on solid footing in December despite tightening lockdown policies. The flash manufacturing PMI showed that sector expanding at roughly the same rate as November. The flash services PMI slipped for December and fell three points as restaurants and other businesses affected by lockdowns suffer, but it remains well in expansion territory. The final PMIs will be released in early January.

Retail sales were also impacted by lockdowns. Physical retailers, restaurants and other in-person services saw sales decline, while online retailers and grocery stores saw gains. Overall, sales ex-autos dipped 0.9 percent.

Housing data showed the housing boom accelerated in November. Starts and permits climbed higher than expected to annualized paces of 1.547 million and 1.639 million, respectively. Homebuilder sentiment fell in December, partially due to rising lumber prices which is itself a positive sign of demand. And although sentiment fell, the reading was the second highest in the history of the survey behind last month’s record high.

There was a dip in the otherwise positive trend in the U.S. labor market. The number of jobless claims was reported as the highest number since the start of September. The positive flipside of this seemingly negative report is that disappointing jobless claim data adds more pressure on lawmakers to move urgently to agree on and approve a second coronavirus stimulus relief package.

The holiday shopping season has put a strain on package delivery services with the surge of online purchases. FedEx (FDX) shares dropped by 5.71 percent on Friday upon the news of significantly higher costs reported in its quarterly expenses. The company has been challenged by skyrocketing demand for holiday package delivery more than any previous year. UPS (UPS) was subject to the same delivery demand dynamics as FedEx and saw its shares take a similar hit as a result.

After completing its second round of stress test, the Fed announced on Friday that it will permit large banks to resume their practice of share buybacks to start in the first quarter of next year. Dividends will be capped by the Fed, but this announcement is a major boon for shareholders who depend on share repurchases for up to 70 of the capital payouts that they receive. This news drove a spike in shares for large banks, with JPMorgan (JPM) shares rising by 5.3 percent on Friday. Goldman Sachs (GS) shares gained 4.4 percent for the day, while Wells Fargo (WFC) increased 3.5 percent.

The Fed publicly signaled an improved economic forecast outlook for the end of this year and the beginning of 2021. Rather than maintain its previous prediction from back in September of a decline in GDP of 3.7 percent, the Fed indicated an improved outlook of a reduction of 2.4 percent. In addition, the Fed released an improved forecast on GDP for 2021 with a bump from 4.0 percent over the year to 4.2 percent in light of enhanced economic recovery conditions.

As expected, the Fed confirmed at its meeting last week that interest rates would remain at almost zero. Along those same lines, the Fed officially announced that it stands by its previous inflation estimate for the coming year at 1.2 percent, which raises no immediate cause for alarm in the short-term.

The Fed’s revised economic outlook on unemployment data reflects more positive news. Last week, it reduced its prediction for the overall 2020 unemployment rate to 6.7 percent, down from 7.6 percent.

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