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Dow, S&P 500 end year at record highs as Trump signs stimulus bill

A 10% decline in the market is fairly common – it happens about once a year. Investors who realize this are less likely to sell in a panic, and more likely to remain invested, benefitting from the wealth-building power of stocks. – Christopher Davis

The major stock averages ended an otherwise dismal year on a positive note last week as the Dow Jones Industrial Average and the S&P 500 Index closed at record highs while the Nasdaq Composite Index and the Russell 2000 Index of small cap stocks finished just shy of their all-time highs. After suffering its most rapid 30% decline on record in March due to the pandemic, the S&P 500 rebounded strongly to post a total return of 18.4% in 2020. The impetus for the upward move in stocks last week appeared to come from President Trump, who signed the economic relief bill for $900 billion into law, averting a government shutdown and extending unemployment benefits to millions of Americans. Although the House passed a bill for $2,000 stimulus checks to individuals, the Trump-backed proposal failed to gain traction in the Senate, meaning most people will only receive $600. The other positive development last week was the announcement by the University of Oxford and AstraZeneca that their coronavirus vaccine was approved by a British regulator. This vaccine is easier to handle and less expensive than those developed by Pfizer and Moderna, but late-stage trials were not nearly as effective. While over 4 million people have been vaccinated in the U.S. so far, the goal of vaccinating 20 million people by year-end has fallen way short. This comes at a time when the number of Covid-19 cases continues to increase with at least 184,000 new infections per day over the past week. More worrisome are predictions that the country could see a surge in new Covid-19 cases after Christmas and New Year’s. With the number of coronavirus cases rising at the same time that the vaccine rollout is behind schedule, more restrictions on businesses and lockdown measures could be implemented, slowing the economic recovery even further.

Last Week

It was a quiet week for economic data as weekly jobless claims declined by 19,000 to 787,000, which was better than expected but still high compared to any week before the pandemic. The S&P CoreLogic Case-Shiller 20-City home price index rose nearly 8% in October compared with 12 months ago due to strong demand and limited supply. It was the biggest annual increase in more than 6 years as Covid-19 has caused many potential buyers to move from urban apartments to suburban homes.

For the week, the Dow Jones Industrial Average rose 1.4% to close at 30,606 while the S&P 500 Index also gained 1.4% to close at 3,756. The Nasdaq Composite Index added 0.7% to close at 12,888.

This Week

Jobs will be the main focus this week as ADP releases its National Employment Report for December, the Department of Labor reports weekly jobless claims and the Bureau of Labor Statistics releases the December employment report. The latter is expected to show that only about 114,000 new jobs were created and that the unemployment rate edged higher to 6.8% from 6.7%. Durable goods orders, construction spending and factory orders for November are all expected to increase 1% or less. Finally, the ISM Purchasing Manager’s Index (PMI) for manufacturing and services is forecast to be in the mid-50s, a sign of solid expansion.

The Federal Open Market Committee (FOMC) releases minutes from its monetary policy meeting last month.

The most notable companies scheduled to report quarterly earnings this week are Conagra Brands, Constellation Brands, Walgreens Boots Alliance, Acuity Brands and Micron Technology.

Portfolio Strategy

Now that the economic relief package has been signed into law, the next big event for the markets will be the Senate runoff election in Georgia on Tuesday since it will determine which party controls the U.S. Senate. With President-elect Joe Biden headed to the White House and a Democratic-controlled House of Representatives, the markets would prefer that the Republicans maintain the majority in the Senate. For this to happen, either Republican candidate in the two Senate races would have to win. This outcome would likely prevent Biden and the Democrats from raising taxes and making more progressive policy changes. A win by either Republican candidate could also cause stocks to rally as the market tends to favor gridlock in government. At the moment, the two Senate races are too close to call with the polls indicating no clear cut favorite in either race. Wins by the Democratic candidates in both races would give that party control of the White House, House and Senate and likely lead to higher taxes and increased spending with worries that the former could do damage to an economy that is already struggling to recover from the pandemic. If the election results are as close as the polls seem to suggest, the outcome may not be known for days, creating even more uncertainty for the markets. The slower than expected rollout of the vaccine also could add to the uncertainty by putting the nascent economic recovery in jeopardy and leading to profit-taking on Wall Street as stock valuations are at record levels. The stock market has risen on optimism about a timely and successful rollout of the vaccines and an economy returning to normal. If for some reason this is delayed or does not happen, the high stock market valuations could be problematic.