Bad News is Good News – Monday Morning Market Memo – December 7, 2020

Bad News is Good News – Monday Morning Market Memo – December 7, 2020

Good morning,

Stocks closed out trading last week with decent gains on Friday, with the Dow Jones Industrial Average rising nearly 250 points. The daily market gains came despite the November Jobs Report coming in weaker-than-expected, as the U.S. Department of Labor reported Friday morning the economy added 245,000 jobs last month (notably below consensus estimates looking for a gain of around 425,000 jobs).  The twist is that this miss on the jobs number, which is bad news, led many investors to believe Congress will respond with another round of economic stimulus, which is good news.  Some reports in the financial media have indicated there may be a compromise deal in the range of a $900 billion aid package.

For the week as a whole, the Dow rose 1% to 30,218 – the Standard & Poor’s 500 Index added 1.7% to 3,699 – and the NASDAQ Composite gained 2.1% to 12,464. These are all record high closes, with the major stock market averages posting their fourth weekly gain out of the last five. Also at a record high is the Russell 2000 Index (a measure of small-cap stocks) which rose 2% to end last week at 1,892. Besides the bad news is good news theme from last Friday, the stock market’s advance has been primarily based on the positive outlook for COVID-19 vaccines along with monetary stimulus by the Federal Reserve.  Ultimately, over the long term, stock prices track underlying corporate earnings.

Wrapping up third-quarter’s earnings season – with 99% of the companies in the S&P 500 reporting actual results, 85% have reported a positive earnings surprise and 79% have reported a positive revenue surprise – according to data from FactSet.  Looking ahead to the fourth-quarter of 2020, the estimated earnings decline for the S&P 500 is -10.1%, which would mark the third-largest year-over-year decline in earnings reported by the index since the third-quarter of 2009 (also according to FactSet).  Remember, the stock market reacts to news versus what expectations were/are and it is also a forward looking mechanism, with prices based on future (not past) earnings!  Cleary, the market is looking ahead to better situation in 2021.

As always, call us with any questions you may have or if you would like to set up a meeting.

All the best – Southport Station Financial Management, LLC