Market Commentary for the week ending January 16th, 2021
- Small U.S. stocks continued to climb higher while most others declined.
- Several large banks reported earnings kicking off what should be an interesting quarter.
- Retail sales were lower for the third consecutive month but surprisingly strong for the year.
Earnings Season Kickoff
The quarterly earnings season got kicked off this week with a handful of large financial institutions reporting first. Although the earnings from these 6 large financial institutions were better than Wall Street had expected (“Earnings Surprise” column in below table), it wasn’t enough for investors as 5 of the 6 stocks closed lower for the week.
It's going to be an interesting quarter of earnings given the slowdown in the economy during the fourth quarter as COVID numbers surged. Many of the stocks most impacted by the economic slowdown have been the ones performing the best recently so we will see if those gains will hold.
This Week’s Performance Highlights
- Large U.S. stocks as measured by the S&P 500 dropped -1.5% for the week but remain higher year-to-date by +0.5%. The NASDAQ Composite fell a similar -1.5% and is holding onto a gain for the year of +0.9% while the Dow Jones Industrial Average was lower for the week by -0.9%
- Small U.S. stocks continued to power higher, the only major group of stocks to do so for the week, gaining +1.5%. Already up +7.5% year-to-date it has been an outstanding start for small stocks in 2021.
- Energy stocks were the biggest winners for the second consecutive week up another +3.2%. Five of the 10 best performing S&P 500 stocks were in the energy sector including Occidental Petroleum (OXY) and Marathon Oil (MRO).
Technology stocks were the worst performing group for the week and year-to-date with a loss of -2.6%. The accompanying table highlights some of the bigger losers for the year among the big tech companies.
- International stocks were lower across the board with developed country stocks falling the most down -1.8%. There was a wide range in performance though among the developed regions with the Eurozone getting hit the hardest off by -3.1% while stocks in Japan were lower by just -0.8%.
- Emerging markets where lower as well but not by as much down just -0.7%. Helping this group’s performance were gains in the biggest of the emerging markets, China and Hong Kong, both up +0.6% for the week.
- Real estate stocks jumped +2.5% for the week recovering nearly all of their losses from the week before. Gold was down for the second consecutive week off -1.3% and now lower by -4.1% for the year. Commodities prices inched higher for the week by +0.2%.
- Bond prices gained a fraction up +0.1%, helping the performance of a diversified portfolio, with the yield on the benchmark 10-Year U.S. Treasury remaining solidly above 1.0%.
Delta Air Lines (DAL) was the first in the group to report quarterly results with revenue down -65% from the prior year with a loss of -$755 million. Passenger revenue was down -74% but this was offset by gains in cargo revenue. Although the loss for the quarter is sizeable it has improved a great deal from earlier quarters as illustrated in the accompanying graph.
As of year-end 2020, the S&P 500 was selling at 22.3 times next year’s earnings (forward price / earnings ratio) according to J.P. Morgan Asset Management. This means that each dollar of earnings a company produces is valued at more than double what it was in 2009 but still not quite as expensive at the end of the tech-bubble in early 2000.
Source: J.P. Morgan Asset Management Guild to the Markets, U.S., 1Q 2021
Retail Sales disappointed in December falling -0.7% following a revised lower -1.4% drop in November. The below graph shows 2020’s month-by-month gains and losses.
December’s numbers were even worse, down -2.1%, when factoring out auto sales and gasoline. Bars and restaurants, as expected with renewed COVID lockdowns, were off sharply but the big surprise came from internet sales plunging -5.8%.
In spite of the disappointing final three months of the year, sales for the year increased at the fastest rate in a decade and well ahead of the multi-decade average up +6.3% in 2020 as illustrated below. Although sales shifted from various categories, for example falling -19.5% for bars and restaurants while gaining +14.0% for building materials, overall consumers continued to spend money throughout the pandemic.
The Consumer Price Index (CPI), a measure of retail inflation, jumped in December by +0.4% following a +0.2% increase the month before. December’s gain was largely the result of gasoline prices surging +8.4%. Year-over-year numbers paint an entirely different picture with overall inflation up a relatively small +1.4% helped by gasoline prices being down -15% for the year.
Producer Prices, the PPI, a measure of wholesale inflation, were also impacted by higher gas prices driving the Producer Price Index higher by +0.3% in December. Similar to consumer prices, year-over-year gains were modest both indicating very little inflation in the economy.
Industrial Production, a measure of manufacturing, mining, and utilities, showed broad gains in December contracting the slowdown by consumers. Overall production was up +1.6% with manufacturing gaining +0.9% while utility output surged +6.2% as colder weather returned.
The wave of COVID cases continues to weigh on consumer sentiment with the index slipping in early January to 79.2%. Consumers view of both the current economy and where it will be in 6 months were lower but economists hope this all turns in the second half of 2021 as the economy reopens.
Upcoming Economic Reports
- Housing Starts
- Existing Home Sales
- Initial Jobless Claims