S&P 500 closes at record high despite rising Covid-19 cases, weak jobs report

If people are risk-tolerant and afraid of being out of the market, they buy aggressively, in which case you can’t find any bargains. That’s what the Fed engineered by putting rates at zero. – Howard Marks

The stock market continued to defy gravity last week as all three major averages posted gains and closed at all-time highs on Friday despite rising Covid-19 cases across the country and a weaker than expected employment report. The Russell 2000 Index of small-cap stocks also closed at a record high with a gain of 2%. It was a November to remember as the Dow Jones Industrial Average rose nearly 12% during the month and the S&P 500 Index climbed nearly 11%. The fact that hospitalizations for the virus rose sharply and the U.S. reported the highest single-day death toll ever on Wednesday didn’t seem to matter to investors as they chose to focus instead on the positive vaccine news. Moderna said that its new trial data showed that its Covid-19 vaccine candidate was more than 94% effective and plans to ask the FDA for emergency clearance. The Pfizer and BioNTech vaccine was approved for emergency use by the United Kingdom and they also applied to the European Medicines Agency, enabling the vaccine to be used in Europe by year-end if approved. Along with this positive vaccine news, there were hopeful signs that Congress would pass a new stimulus deal before the end of the year. A bipartisan group in the Senate proposed a $908 billion economic relief package that drew support and after a disappointing November jobs report, the odds increased that a bill would be passed. In effect, bad news is actually good news as the worse the economy gets, the greater is the likelihood that an agreement will be reached. The economy added only 245,000 new jobs, well below the estimate of 440,000, and even though the unemployment rate fell to 6.7% from 6.9%, the reason for the drop was that more people left the workforce entirely. Rising Covid-19 cases coincided with a slowdown in hiring and there are still about 11 million people that are considered unemployed. Unless a deal is done, the next quarter or two could see flat or even negative GDP growth. While vaccines may be approved as early as this month, widespread distribution won’t occur until mid-2021 at the earliest, possibly delaying an economic recovery.

Last Week

The jobs report issued by ADP was also weaker than expected as private payrolls totaled only 307,000, compared to expectations of 475,000. Weekly jobless claims, however, were 712,000, lower than the estimate of 780,000. The ISM Manufacturing Purchasing Manager’s Index (PMI) for November was slightly less than in October but was solidly in expansion territory for the seventh straight month while the ISM Non-Manufacturing or services sector PMI for November was also less than in October but has expanded for six consecutive months. U.S. construction spending in October was better than expected on the strength of single-family home building, which has been a bright spot for months.

The Federal Reserve’s Beige Book, a survey of business conditions across the country, found that economic activity was slowing in November as coronavirus cases surged and optimism had fallen due to renewed lockdown restrictions and looming expiration dates for government support programs.

For the week, the Dow Jones Industrial Average rose 1.0% to close at 30,218 while the S&P 500 Index gained 1.7% to close at 3,699. The Nasdaq Composite Index climbed 2.1% to close at 12,464.

This Week

Both the producer price index (PPI) and the consumer price index (CPI) for November are expected to increase slightly with the year-over-year rise in the CPI just 1.1%. The preliminary University of Michigan consumer sentiment index is expected to be slightly below the reading in November.

The European Central Bank will meet to review its monetary policy and is expected to keep its key interest rate unchanged at negative 0.5% and possibly announce new stimulus measures.

Among the most notable companies scheduled to report third quarter earnings are Costco Wholesale, Casey’s General Stores, Vera Bradley, GameStop, Campbell Soup, Toll Brothers, AutoZone, H&R Block, Adobe and Broadcom.

Portfolio Strategy

Until recently, stocks of companies that pay above-average dividend yields along with those companies that have a long history of increasing their dividends every year had significantly lagged the performance of the S&P 500 Index. Part of the reason for this underperformance is that the S&P 500 Index is a market-capitalization-weighted index so the largest companies are mostly responsible for the total return of the index. With the onset of the coronavirus pandemic in March, it has been the big technology companies such as Apple, Amazon, Facebook, Alphabet (Google) and Microsoft which pay little or no dividends that have soared. Beginning in November, however, all of that changed when it was announced that Pfizer and BioNTech had a vaccine for Covid-19 that proved to be over 90% effective in late-stage trials. That news, coupled with Moderna’s subsequent announcement about the success of its vaccine candidate, began the rotation by investors into value stocks, which had performed poorly up until then. These positive developments about the coronavirus vaccines were welcome news for many dividend stocks since value stocks tend to have above-average dividend yields and better prospects for dividend growth. The Vanguard Dividend Appreciation ETF (VIG), which tracks the performance of stocks of companies with a consistent record of dividend growth, has returned 13.7% this year compared to the S&P 500 return of 16.4%. Other ETFs that focus on dividend-paying companies include the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) and the SPDR S&P Dividend ETF (SDY). Both of these ETFs track the performance of a specific index with the former investing in companies that have paid dividends and grown them for at least 25 straight years and the latter investing in the highest dividend yielding companies that have a policy of increasing dividends every year for at least 20 consecutive years. In addition to providing decent income, these ETFs are also defensive in nature as they capture most of the gains in rising markets and fewer of the losses in falling markets.