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Stocks gain on positive vaccine news, hope for stimulus bill

Outperforming the majority of investors requires doing what they are not doing. Buying when others have despaired, and selling when they are full of hope, takes fortitude. – John Templeton

The stock market turned in another positive week as the Dow Jones Industrial Average, S&P 500 Index and Nasdaq Composite Index all closed at record highs on Thursday only to relinquish some of the gains on Friday. For the week, the S&P 500 rose 1.3% and has gained 15% for the year while the technology-heavy Nasdaq jumped over 3% and has soared a remarkable 42% since January 1st. At the same time that the market is trading near all-time highs, the number of Covid-19 cases has also surged to record levels with the U.S. death toll from the virus climbing to over 315,000. But the stock market is forward-looking and the first doses of a vaccine produced by Pfizer and BioNTech were administered on Monday, giving people hope that there will be brighter days ahead. Later in the week, there was more good news as the FDA said that data on Moderna’s coronavirus vaccine met expectations for emergency use and was approved. The company announced that it would provide an additional 100 million doses with distribution beginning immediately. There also was renewed optimism last week that Congress would finally get its act together and pass a much-needed stimulus bill. A new bipartisan economic relief package called for $748 billion in spending for programs agreeable to both Republicans and Democrats, including $300 per week in federal unemployment benefits and another $300 billion for more loans under the Paycheck Protection Program. While both sides were getting closer, there was still no deal. The Federal Open Market Committee (FOMC) also met last week and kept interest rates unchanged near zero while announcing that it would increase its asset purchases if the economic recovery slows. It gave assurances that it would buy up to $120 billion of bonds each month until its maximum employment goal and inflation target are met. Certainly all of this good news is positive for the economy, but much of it is already reflected in elevated stock prices, limiting any further upside over the near-term.

Last Week

Retail sales in November fell much more than expected due to surging Covid-19 infections and decreasing household income. It was the first decline in retail sales since April. Preliminary December manufacturing data was better than expected while services sector data was less than forecast, although numbers for both were solidly in expansion territory. The data suggests that the manufacturing sector is better able to handle rising virus cases than the services sector. Weekly jobless claims were 885,000, above expectations and the highest level since early September.

For the week, the Dow Jones Industrial Average rose 0.4% to close at 30,179 while the S&P 500 Index gained 1.3% to close at 3,709. The Nasdaq Composite Index climbed 3.1% to close at 12,755.

This Week

November existing home sales and new homes sales are expected to be less than in October but still at levels that are indicative of a strong housing market. Durable goods orders for November are also forecast to increase only modestly and less than in the prior month. Consumer confidence in December is expected to be slightly higher than in November and the final reading of third quarter GDP is expected to be the same, showing an annualized increase of 33.1%.

Financial markets will close early on Thursday December 24th for Christmas Eve and will be closed on Friday in observance of Christmas Day.

The only notable companies scheduled to report third quarter earnings this week are CarMax, Cintas and Paychex.

Portfolio Strategy

All eyes will be on Congress this holiday-shortened week to see if it can pass a stimulus bill to help offset an economy that is showing signs of slowing. With third quarter earnings reports down to a trickle and little in the way of important economic data, it promises to be a quiet week. However, on Monday, the market could be volatile with the addition of Tesla into the S&P 500 Index. Tesla, which designs, develops, manufactures and sells high-performance, fully electric vehicles and components as well as renewable energy products, is the largest company ever to be added to the S&P 500 Index with a market capitalization of more than $600 billion after its 700% rally this year. Its inclusion in the index will make it the 7th largest company and create the largest rebalancing of the S&P 500 in history. Any passive funds that track or try to replicate the S&P 500 have to buy nearly $90 billion shares of Tesla while, at the same time, sell a like amount of shares of the rest of the index in order to make room for it. Although the company has strong growth prospects, its valuation has gone through the roof as the stock trades at a price earnings ratio of 300 times 2020 earnings and 200 times earnings in 2021. As a means of comparison, the S&P 500 Index, which many strategists and traders consider overvalued, has a price earnings ratio based on next year’s earnings of about 22. Former Federal Reserve Chairman Alan Greenspan coined the term ‘irrational exuberance’ for the stock market in the mid-1990s as it soared to nosebleed levels only to crash in 1999. That term could be applied today to Tesla, which is a company with a bright and promising future but whose stock has gotten way ahead of itself on a valuation basis.