The end of the GameStop saga, coupled with hopes for at least $1 trillion in new stimulus funds, has juiced Wall Street bulls to rally markets on their best week in months.
MANHATTAN (CN) — Punctuated by the progression in the Senate of a nearly $2 trillion stimulus package and the seeming end to the GameStop saga, Wall Street enjoyed one of its best weeks since November.
The Dow Jones Industrial Average gained about 1,100 points for the week — increasing steadily each day — though it is still lower than its previous record high from last month. The S&P 500 and Nasdaq have had similar runs. The Nasdaq gained nearly every day, losing only a couple of points on Wednesday, to finish the week with a 786-point increase. The S&P 500 gained 172 points to hit a new record of 3,886 points.
Markets have been quick to put the furor over last week’s GameStop short squeeze behind them. Shares of the video game company, which at one point reached nearly $500, have dwindled down to $63 per share as retail investors and institutional investors pulled out of their positions.
On Friday, traders once again moved in on GameStop when retail investment platform Robinhood removed trading limits on the stock. The company’s shares gained 10% in the day’s trading.
Regulators are now closely scrutinizing all sides of the phenomenon, including whether Robinhood unfairly limited trades and whether investors used chatrooms and message boards to coordinate a pump-and-dump scheme with the stock.
On Thursday, newly confirmed Treasury Secretary Janet Yellen met with members of the Securities and Exchange Commission, Commodity Futures Trading Commission and the Federal Reserve to discuss the recent short squeezes. In a statement following the meeting, the Treasury noted that “the core infrastructure was resilient during high volatility and heavy trading volume,” and that regulators would continue to examine the trades.
Investors also likely were pleased with progress on the stimulus front. In the early Friday morning hours, Vice President Kamala Harris broke the 50-50 tie in the Senate to pass a third stimulus package via reconciliation. The bill, which currently has a $1.9 trillion price tag, returned to the House this afternoon where it passed for the second time. It won’t go to the president’s desk, however, until it works its way through congressional committees — possibly chipping away at its many offerings before it faces yet another vote by the full Senate.
“It will be harder to get all 50 Democratic senators to support the full $1.9 trillion package, which is why we still think the final stimulus will be a more modest $1 trillion and will have the proposed minimum wage hikes omitted,” wrote Paul Ashworth, chief U.S. economist at Capital Economics.
Democratic Senator Joe Manchin of West Virginia is considered iffy for supporting the $1,400 stimulus checks or minimum wage hike.
All told, equity markets have had a phenomenal January, and some experts see that fact as a good omen.
“We’ll never fully rely on just one indicator, but ‘so goes January so goes the year’ is ingrained enough in investors’ minds that it’s worth putting in historical context,” wrote Jessica Rabe, co-founder of DataTrek Research.
Since 1980, when the S&P 500 has been positive in January it has also had a positive annual return in more than four out of five of those years, Rabe found. Even when the S&P had a sour January, about 63% of those years turned out well in the end for the index.
The index has had “very bad” January returns of negative 5% or less five times since 1980, Rabe’s research found. The S&P has been “slightly bad” —or down up to 2% — five times in that time span, Rabe found, including last month, when it lost 1.1%.
As compared with those other years, however, Rabe wrote that 2021 differs in that interest rates are already low and likely to remain so for the foreseeable future, and no wars or other similar geopolitical concerns are a major issue.
“While January 2021 did not start off on the best foot, there’s more historical precedence for it to register a positive performance over the balance of the year than negative,” Rabe wrote. “And even though it’s a tall order for the S&P to end 20212 up double digits for a third year in a row, low interest rates and improving corporate earnings power could still enable the index to produce the average rest-of-year return of +5% after its tough January.”
Amazingly good earnings reports by many companies also have boosted Wall Street’s confidence.
Companies listed on the S&P 500 are increasing their earnings estimates, with the median estimate increased by 3.2%, according to John Butters of FactSet Research.
For comparison, the second quarter of 2020 saw a 29% decrease in earnings per share (EPS) estimates, while the third quarter saw a 1.4% increase.
“In fact, the first quarter marked the second-highest increase in the bottom-up EPS estimate during the first month of a quarter since Q2 2010, trailing only Q1 2019,” Butters wrote.
“The only negative point has been the initial response to these exceptional earnings,” James Vogt of Tower Bridge Advisors wrote. “On average, companies that beat both revenue and earnings-per-share predictions have declined the next day of trading by 1%.”
Vogt noted that “stocks are now staging a strong rebound, led by the big growers and reflation beneficiaries,” since the short squeeze has abated. “Call it a delayed effect to really positive reports.”
On Main Street, however, things are not wholly positive. A variety of jobs reports paints a precarious position at the beginning of the year, though with hints of better things to come later in 2021.
In its report, the Bureau of Labor Statistics showed a slight gain of 49,000 jobs in nonfarm payroll employment. The results are less than what many experts had predicted, and the private sector contributed only 6,000 jobs to the gain, far below anticipated increases.
“It may look good, but it ain’t,” wrote Gregory Daco of Oxford Economics. He noted the headline gain in jobs masked both the typical seasonal lift and a decline in the labor force participation rate. Still, Daco wrote, things are still projected to look better later this year.
“We foresee increased vaccinations, stable household finances — supported by increased fiscal transfers and elevated savings — and robust business and housing sector activity contributing to a 6.6 million jobs rebound in 2021, with the unemployment rate falling by 5% by year-end,” he wrote.
In its employment report, ADP showed a 174,000 increase in private sector jobs from December to January. The gains were mostly in medium-sized businesses, with small- and large-sized companies gaining 51,000 and 39,000 jobs, respectively.
The gains in January 2021 are only 30,000 fewer than those from a year ago, though many economists had agreed that the economy was already shrinking by then.
Unemployment also has improved, though not by much. The Bureau of Labor Statistics pegs the number at 6.3%. According to the Labor Department, about 780,000 new claims were filed for the week ending January 30 — 33,000 fewer than the prior week. Combining federal unemployment insurance programs, more than 17.8 million Americans were claiming benefits as of January 16.
But while job gains chip away at the unemployment block, more than one in three Americans without a job — about 4 million — are now classified as long-term unemployed, according to Bureau of Labor Statistics.
Things are mixed for small businesses, too. The National Federation of Independent Business found in its latest survey that, while fewer small businesses warn they would have to shut down if economic conditions don’t improve soon, many also are concerned about a potential increase in the minimum wage.
“The reopening of the Paycheck Protection Program is likely a main factor in the decrease of those anticipating having to close their doors soon but still, the economic recovery remains uneven for small businesses,” Holly Wade, executive director of the association’s research center, said in a statement.
Only 40% of small businesses surveyed report their sales are back or nearly back to where they were before the pandemic struck last spring. One-third of respondents predict it will take until at least until the end of the year for business conditions to return to normal.
Vaccinations still continue apace, though some expect the rate to increase. On Thursday, Johnson & Johnson requested emergency authorization from the Food and Drug Administration for its vaccine. The vaccine is less effective than the ones by Pfizer and Moderna, but Dr. Anthony Fauci touted it as at least 85% effective in preventing severe disease.
According to Johns Hopkins University, more than 105 million cases of Covid-19 have been reported worldwide, with nearly 2.3 million deaths. In the United States, 26.7 million Americans have contracted the disease, while about 456,000 have died.