Markets Shine as Biden Administration Dawns, With Clouds on the Horizon

Wall Street kept the party rolling while political control in the Capitol shifted, posting fresh highs even as worries linger over a slow rebound.

Like woolen mittens on the Vermont senator, markets this week stayed warm and toasty. (Saul Loeb/Pool Photo via AP)

MANHATTAN (CN) — Investors have rallied in the first few days of the Biden presidency, though expectations are tempered by persistent infighting over the next stimulus package and concerns about a sluggish recovery.

Under President Trump, Wall Street had done exceptionally well, even during the pandemic, when markets dipped severely but then posted fresh highs months later. Trailing after former Presidents Obama and Clinton, the S&P 500 under Trump had the third-best performance of the last 15 presidents, according to researchers.

While it remains to be seen whether such record highs will persist under President Biden, so far it seems to be the case.

All three U.S. indices set fresh records on Inauguration Day. The Nasdaq rose 260 points to settle at 13,457 points, while the S&P 500 gained about 60 points to finish the day at 3,851 points. The Dow had a moderately positive outing on Wednesday, but it also hit a new high of 31,188 points.

The rally pulled back a bit on Friday, with the Dow dropping 179 points and the S&P falling 11 points. The Nasdaq didn’t sleep, hitting a new high point once again at 13,543 points. 

Investors have kept an overall positive outlook on the economy, though driving the nagging worry is pushback from Republican lawmakers and at least one Democratic senator to President Biden’s $1.9 trillion stimulus proposal.

“The creeping realization that the comeback may take longer than expected is also starting to impact the equity markets,” wrote Boris Schlossberg of BK Asset Management. “Profit taking could accelerate into next week as the market begins to consider the bruising battle for stimulus in Washington, D.C.

“The Republicans in the Senate have signaled that they will not cooperate on President Biden’s relief agenda, and as any shred of bipartisanship disappears, so may some of the recent market gains.”

Whether lawmakers want it or not, however, some traditionally conservative groups are bucking the typical right-left split and could force bipartisanship.

During a conference call with reporters on Thursday, U.S. Chamber of Commerce lobbyist Neil Bradley said the trade group is sick of the partisan bickering that marked the Trump administration. 
“That’s been the failure of the last several years,” Bradley said, noting that the group will hold lawmakers who do not make good-faith efforts to reach consensus accountable. 

The chamber has publicly supported Biden’s ambitious agenda to ramp up vaccinations and mask-wearing mandates in his first 100 days, as well as efforts to reopen schools. “There’s no excuse on waiting on those elements,” Bradley said.

Other factors could also light a fire under lawmakers hesitant about passing another stimulus package.

Unemployment, for instance, continues to remain extremely high. For the week ending January 16, more than 900,000 claims were filed, compared with 926,000 the previous week. Last week’s numbers originally were listed as 965,000 but were revised downward.

Including federal claims, which are filed under new pandemic-related programs, more than 1.3 million Americans filed for unemployment last week. 

Fortunately, continuing claims dipped by 127,000, coming in at just a hair above 5 million for the week ending January 9. However, the decrease could be due to the fact that unemployment benefits have been expiring for many Americans.

On a positive note, several major companies released earnings reports this week, helping prop up markets with positive news.

In the financial services world, things were mostly cheery. Goldman Sachs revenue clocked in at $11.74 billion for the fourth quarter of 2020, nearly $2 billion more than analysts had expected. The bank’s net earnings for the fourth quarter were $4.5 billion, most of which came from its investment banking division.

Morgan Stanley also reaped huge rewards last quarter, posting a 51% increase in profits to nearly $3.4 billion. The bank’s $13.6 billion in revenue was $2 billion above what many had predicted and was nearly $3 billion higher than the fourth quarter of 2019.

As with Goldman Sachs, Morgan Stanley’s investment banking division carried the majority of the work, posting a 46% year-over-year increase in revenues. 

Entertainment, which has fared well during lockdowns, continues to thrive. Netflix posted $6.4 billion in revenue last quarter, a major jump over its $5.4 billion in revenue a year ago. While the streaming service now boasts more than 200 million paid subscribers, however, it reported a drop in net income, from $587 million in Q4 2019 to $542 million last quarter.

Netflix now faces staunch competition from Disney+, Apple, HBO and Amazon. During the call with investors, Netflix President Wilmot Reed Hastings said the company was not underachieving, pointing to the fact it has shown an annualized return of 40% over 18 years. “If that’s underperformance, we’ll do more of that,” he said.

Due to the persistent need for cleaning products, Procter & Gamble reported an 8% increase in net sales during its second quarter of 2021. The company — which makes Bounty-brand paper towels, Tide-brand detergent and a slew of home cleaners — works on a different financial schedule than many other companies.

Overall, companies expect good things in 2021. Research by John Butters at FactSet shows that 56 of the 85 S&P 500 companies have issued positive earnings guidance for the last quarter, while just 29 have issued negative guidance. So far, this is the largest batch of positive earnings since FactSet began tracking the data in 2006.

Manufacturing is showing its resilience, too. The Federal Reserve Bank of Philadelphia reported earlier in the week that activity increased 17 points to 26.5 so far this month, the highest reading in almost a year. 

“Looking ahead, manufacturing will stay on an upbeat track, though we expect growth to soften as vaccines and the economy’s reopening unleash pent-up demand for deeply damaged services,” Oren Klachkin, lead U.S. economist at Oxford Economics, predicted. “The Biden administration’s American Rescue Plan will carry the economy through the soft patch that’s developed at the start of the year and bolster the recovery over the course of 2021.”

Experts worry that the trend for the past year — the strong get stronger, and the weak links in the economy flounder and die — may continue. “Housing and manufacturing have been leading the recovery and it looks like they will continue to do so,” consultant Joel Naroff wrote. “But the labor market remains iffy, which is a technical economic term for not so good.”

Additionally, while vaccinations are taking hold over some portions of the U.S. population, cases of Covid-19 are expected to remain high through the winter. According to Johns Hopkins University, more than 97 million cases of Covid-19 have been reported worldwide, with more than 2 million deaths. In the United States, 24 million Americans have contracted the disease, while more than 410,000 have died.

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