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Market Commentary for the week ending February 6th, 2021

Summary

  • Stocks posted their biggest weekly gain since November following a dismal performance the week before.
  • Employment growth resumed albeit at a tepid pacewith the unemployment rate dropping but only because many people gave up looking for jobs.
  • The price of oil surged nearly $5 per barrel helping propel energy stocks to a gain in excess of +8% for the week.

 

Profile of a High Performing Stock

MGM Resorts (MGM), the largest operator on the Las Vegas strip with more than 35,000 room, had the second best performing stock among the S&P 500 this week surging +19.9% crossing its pre-pandemic high. As the accompany graph shows, the stock collapsed during the COVID crash last year hitting a low of $7.14 and now trades at $34.25…an incredible recovery!

MGM resorts international (MGM) stock price

Stocks such as MGM, and there are many more, have been fascinating to watch given their phenomenal stock performance even as they continue to face operational challenges and a lengthy full recovery. For example, the below graph shows MGM’s quarterly revenue for the most recent 4 quarters. They are very much experiencing a rebound but analysts a forecasting it will be sometime AFTER 2022 that the company’s revenue and earnings reach pre-pandemic levels.

MGM resorts international (MGM) quarterly revenue ($billions)

Source: www.YCharts.com

This Week’s Performance Highlights

Market Indexes week ending February 5, 2021

Source: www.YCharts.com

Markets around the world rallied posting impressive gains for the week after having fallen sharply the week before. It was a total flip-flop by investors who had previously fled from more risky assets, such as small stocks and emerging markets, but then rushed back pushing these assets up more than their safer counterparts.

  • At the close of the week large U.S. stocks, as measured by the S&P 500, closed higher by a stellar +4.8% while the Dow Industrials lagged, up +3.9%, and the NASDAQ topped them both gaining +6.0%. All three of these market indexes are back into positive territory for the year.
  • Small U.S. stocks surged a whopping +7.8% as investors embraced riskier assets.
  • Every sector was higher with gains ranging from just +1.3% for healthcare stocks to energy stocks rocketing higher by +8.2%. Technology stocks closed in the middle of the pack higher by +4.1%. Year-to-date the only sector lower is consumer discretionary including such stocks as Coca-Cola (KO), Dollar General (DG), and Procter & Gamble (PG).
  • International developed markets were the worst performing group of stocks worldwide but still gained +3.2%. Eurozone stocks were among the poorer performers among the developed markets including a relatively small gain of just +2.0% in the United Kingdom. On the opposite end of the spectrum was Italy’s market jumping +7.2% with investors clearly optimistic the country is going to be able to deal with its significant economic issues.
  • Emerging markets, considered among the riskier, climbed +5.5% for the week and are now higher by +8.8% so far in 2021. Again, riskier markets performed better including stocks in Turkey jumping +8.6% while Chinese stocks, the biggest of the emerging markest, were up +4.7%.
  • Commodities were the best performing alternative asset gaining +4.7% as the price of crude oil surged nearly $5 per barrel to close at $57.07. Real estate stocks turned in a strong performance of +3.5% while gold, in another sign of a slight from safety, dropping -1.6%.
  • Bonds had a relatively tough week with prices falling -0.4% and now down -1.2% year-to-date. Consistent with other market behavior riskier high yield bonds actually gained +1.0% while safer government bonds were lower by a sharp -0.62% with the yield on the 10-Year U.S. Treasury closing at 1.169%.

Interesting Numbers

-80.4%

GameStop (GME), the posterchild stock of investor mania in 2021, stock collapsed -80.4% this week. In spite of this miserable week’s performance, the stock remains higher year-to-date by +238%. Only time will tell if this goes full circle and gives up this remaining gain or if the stock can hold at these elevated levels.

Gamestop(GME) year to date performance

Source: www.YCharts.com

Economic Indicators

The January employment report showed a resumption in growth adding 49,000 compared to the prior month’s 227,000 job losses. Although this was a relatively positive headline number compared to the month before, digging a bit deeper shows that 43,000 of the job gains were in government and mostlyseasonal adjustment for K-12 and public colleges teachers.

The private sector created just 6,000 jobs with the biggest gains by a wide margin in professional jobs adding 97,000. Leisure and hospitality lost 61,000 and retail was down 37,800. Even the hot transportation and warehousing industry, growing with the surge in e-commerce, was down 27,800 jobs for the month.

The unemployment rate dropped to 6.3% from 6.7% but only because more than 400,000 people gave up looking for jobs. As the accompanying graph shows the size of the U.S. labor force, those people working or actively looking for work, has steadily increased for decades with the biggest slowdown occurring during the financial crisis more than a decade ago…until COVID.

Labor force size millions

Source: https://fred.stlouisfed.org/series/CLF16OV

In just 3 months, early last year, the labor force shrunk by nearly 8 million then rebound to recover roughly half the losses. Growth generally stalled in the later months of 2020 and has turned negative to start the new year. The big question today is when will the economy fully recover the 10 million jobs that have yet to return.

Both the manufacturing and services sectors are growing at a rapid pace according to separate reports form the Institute for Supply Management (ISM). The index for manufacturing came in at very strong 58.7 (any number of 50 indicates growth) although this was a slight deceleration from the prior month’s 60.7. The strength is broad with 16 of the 18 sectors measured showing growth. These strong monthly readings are near 16-year highs for the index.

The services sector showed acceleration coming in at 58.7 compared to 57.2 the month before. The strength was not quite as broad with only 14 of the 18 sectors reporting growth. Financial services firms and construction companies were among strongest while restaurants, retail, hotel, and entertainment continue to suffer.

Productivity, a measure output, or production, to hours worked, fell at the fastest pace since 1981 at -4.8%. It is generally believed that some economic numbers, including productivity, are being exaggerated by the pandemic’s impact on the economy. To put this most recently quarter’s change in perspective, there were increases in productivity of 10.6% and 5.1% in the two preceding quarters, as shown in the accompany graph, resulting in an increase for the full year 2020.

Productivity annual percent change

Source: https://fred.stlouisfed.org/series/CLF16OV

Upcoming Economic Reports

  • Consumer Price Index (CPI)
  • Consumer Sentiment Index
  • Initial Jobless Claims

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