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A member of the Los Angeles Fire Department directs cars outside a COVID-19 testing site in Los Angeles, California, as the state followed Texas and became the second in the U.S. to surpass one million coronavirus infections, November 12, 2020.
robyn beck/Agence France-Presse/Getty Images
First, the good news. When the S&P 500 SPX, -0.99% has jumped more than 8% over a six-day period, market returns 12 months later were for a rise of 18%, with gains 88% of the time since World War II. Also good — when more than 60% of stocks make one-month highs, stocks rose an average of 13% over the next 12 months, with gains 92% of the time.
Both those milestones were reached on Monday, and now for the bad news — market returns over the next month were just 1% when the S&P 500 jumps more than 8% over a six-day period, and flat when more than 60% of S&P 500 constituents make one-month highs, according to Keith Lerner, chief market strategist at SunTrust Advisory Services, a unit of Truist Financial.
Bullishness has broken out, which means markets will be more vulnerable to bad news. The Hulbert Sentiment Index, which reflects the average equity allocation recommended by newsletter writers, has jumped from 22% at the beginning of November to 64% currently. The latest survey from the American Association of Individual Investors shows the percentage of investors who consider themselves bullish surged to the highest level of optimism since January 2018.
“After largely focusing on what could go wrong, markets were set up for a positive surprise heading into the election or regarding upbeat vaccine news. Now, along with the market’s sharp rise, investor expectations have also risen. This simply means that markets are more vulnerable to unexpected bad news and we anticipate a digestion period of recent gains. This would be normal and somewhat expected,” Lerner says.
There is plenty of news left to unsettle markets — rising COVID-19 cases, the continuing stalemate on additional fiscal stimulus, and the unresolved status regarding control of the U.S. Senate. “However, we appear to be moving closer to the other side of this pandemic, we are likely in the very early innings of a multiyear economic expansion, monetary policy remains very supportive, and relative valuations continue to favor stocks,” he says.
“Therefore, on a net-basis, we expect the market to trade in a choppy fashion near-term and the strong gains to moderate. But we do not want to lose sight of the primary market trend, which our work suggests is higher. For those investors working excess cash into the market, we would continue to average in but look to be more aggressive on pullbacks.”
The buzz
The U.S. recorded new highs on Thursday on confirmed new coronavirus cases and hospitalizations, according to the COVID tracking project. Chicago issued a one-month stay-at-home advisory that goes into effect on Monday, the latest set of restrictions announced by regional and state leaders.
There was a host of mostly well-received earnings. Walt Disney Co. DIS, -1.66% rose 3% in premarket trade as it reported a smaller loss than forecast, and brought in more subscribers to its Disney+ streaming service than expected, though the entertainment giant did say it will skip its semiannual dividend payment scheduled for January. Cisco Systems CSCO, -1.67% jumped 7% as it reported a stronger profit than forecast, even as revenue slipped for a fourth straight quarter, with the network-equipment maker forecasting a better current quarter than analysts had expected.
Luxury-fashion platform Farfetch FTCH, +1.45% reported a smaller-than-forecast loss on higher-than-expected revenue. Palantir Technologies PLTR, -8.64%, the data analytics company, raised its full-year revenue guidance. Chip equipment maker Applied Materials AMAT, -1.91% topped profit and revenue expectations and guided for a fiscal first-quarter that also was better than forecast.
DraftKings DKNG, -0.93% rose 6% as the loss-making sports betting firm lifted its 2020 revenue guidance.
The latest data on producer prices and the University of Michigan’s consumer sentiment index are due for release, and New York Federal Reserve President John Williams is due to speak.
President Donald Trump signed an executive order prohibiting Americans from investing in Chinese companies that support that country’s military, including two that are listed on the New York Stock Exchange, China Mobile CHL, -4.00% and China Telecommunications CHA, -5.34%. In a radio interview, U.S. Secretary of State Mike Pompeo stated Taiwan isn’t part of China. Hours later, China finally congratulated President-elect Joe Biden on winning the election.
Cloud-platform company Fastly FSLY, +5.87% rose in premarket trade after the Trump administration delayed enforcement of its ban on TikTok, which is a Fastly client.
The markets
U.S. stock futures pointed to a strong Friday the 13th, with gains for both the S&P 500 ES00, +0.68% and Nasdaq-100 NQ00, +0.59% contracts. The dollar DXY, -0.11% fell, and gold GCZ20, +0.59% rose.
The yield on the 10-year Treasury TMUBMUSD10Y, 0.877%, which dropped 10 basis points on Thursday, was 0.88%.
The chart
While still higher than pre-pandemic levels, U.S. savings are rapidly depleting. There are a number of Cares Act (Coronavirus Aid, Relief, and Economic Security Act) provisions that will expire at the end of the year, including providing for 39 weeks instead of the 26 weeks of unemployment benefits that most states provide, extending unemployment to self-employed workers, and mortgage and student debt forbearance measures. “Everything is converging on this toward the end of the year, where momentum was already slowing, and now you’re going to see expiring benefits and expiring programs,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. She warns rising defaults and bankruptcies may result if there is no additional aid.
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