The imagery from Washington, D.C., on Wednesday was deeply disturbing. Tragically, five people, including a U.S. Capitol police officer, died as a result of the violent episode. Although it was a dark day in this nation’s history, we should be encouraged that democracy won — again. The business of the United States proceeded unintimidated and undeterred. The rioters did not stop Congress from discharging its duty under the Constitution, as it has done for more than 200 years.
THE WALL STREET WRAP
The Market’s Reaction to D.C. Chaos: Well, more accurately, it’s the market’s lack of reaction. In fact, markets climbed higher as the events unfolded in Washington. Ultimately, they posted a solid week. While that seems to defy logic, it’s not irrational. First, markets are forward-looking mechanisms, and investors are viewing Wednesday’s event as an isolated incident. Recall that markets were relatively stable during widespread social unrest last summer. Instead, markets are more interested in pricing in prospects of a return to normal sometime this year as vaccines roll out.
Secondly, nothing fundamentally changed from a macroeconomic perspective. The Federal Reserve will continue to support markets and the economy until the labor market fully recovers. The vaccine is rolling out (perhaps more slowly than some expected), keeping a late spring or early summer return to normal within reach. Another round of fiscal stimulus was approved. Joe Biden is going to be president on Jan. 20.
The new wrinkle, perhaps overshadowed by the Capitol siege, was that Democrats Raphael Warnock and Jon Ossoff swept the Georgia runoffs. Democrats now have slim majorities in both the House and Senate. Markets viewed the results positively, as it means additional stimulus is likely; but Democrats’ narrow hold in House and Senate should moderate policy, as lawmakers will need to seek compromise to get policies implemented.
And What About Unemployment and the Coronavirus? The market’s rather muted response to surging cases of the coronavirus and sluggish job numbers may also be raising questions. Is the market disconnected from reality?
We don’t think so. As we said in fall, the vaccine has allowed the market to overlook difficult winter months and ahead to better times later in 2021.
First, the latest unemployment news. Employers cut a net 140,000 jobs in December, keeping the unemployment rate unchanged at 6.7 percent. Yes, the jobs report showed overall losses, but it’s worth noting that 498,000 jobs were cut in the leisure and hospitality sector, with three of four occurring in food and restaurant businesses. That’s no consolation for those who lost their jobs, but from a wider view there’s a silver lining here. For months, we’ve said the pandemic is impacting a narrowing slice of the overall economy. Manufacturers are humming, and companies and consumers are adapting. The recent surge in coronavirus cases has hit travel, leisure and dining hard, but the broader economy remains resilient.
Case in point: The December ISM manufacturing and services indexes — our best real-time indicator of U.S. economic growth — were both still strong. Manufacturing rose to 60.7 versus 57.5 in November (anything above 50 indicates expansion), which is the highest since early 2018. The services side also offered an upside surprise, coming in at 57.2 in December versus 55.9 the month prior. This is evidence of resiliency.
In all, markets are rising because the pandemic is viewed as temporal — it will pass. That optimism is also being reflected in the bond market, as the 10-year Treasury rose above 1 percent for the first time since March. These difficult days were forecast weeks before the holiday season, so although these are trying times, they were expected.
As we look deeper into 2021 and beyond the pandemic, we see a U.S. and global economy that will be operating on multiple growth cylinders for the first time since 2017. There’s pent-up demand, consumers are saving more than they have in decades, and the cost of servicing debt is low. These are big tailwinds that will help fuel earnings growth, and markets, this year. The recent strength in markets reflects this optimism.
THE WEEK AHEAD
A Big Month for Small Business: December’s NFIB small-business index will be worth digging into on Tuesday when it’s released. This is a gauge of small business owner sentiment, and there are a lot of variables that will be folded into the numbers: the surge in coronavirus cases and restrictions, the holidays, the contested election and the vaccines. Of note will be the difference between current and future expectations for business owners.
How Did Retailers Fare in December? December retail sales are also due Friday. It’s no secret that December is a critical time of year for retailers, but the pandemic, labor market and shift in consumer purchasing behaviors will undoubtedly have an impact. We’ll sift through the numbers to pull out some key findings.
Looking Ahead in 2021: How are consumers feeling about the economy heading into the new year? We’ll get some insight into that question Friday when preliminary consumer sentiment figures for January are released.
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