The stock market should continue to rally over the next few weeks, helped by several factors. The Trump drama should end soon, the pace of vaccinations pick up, and Q420 corporate earnings risk exceeding expectations. Also, additional fiscal stimulus is more than a possibility now that Democrats control both Houses and the presidency.
The Trump presidency will end either through resignation, impeachment, or out of time when Biden is sworn in on January 20. The first two would presumably be over quickly. And, even if an impeachment drags on, it would become background noise after January 20. The stock market appears to understand this, as it has been barely affected by the headlines.
The slow roll-out of the vaccinations probably reflects a variety of factors, including the difficulty of administering them (particularly the Pfizer one which requires extremely low temperatures) and concerns about an equitable distribution. But, these issues are likely to be overcome. New York, for example, will begin offering inoculations to the elderly and front-line workers this week. Also, Biden is reported wanting to release all the vaccines quickly rather than hold many back to ensure availability for second shots, which apparently has been the case.
A speedup in vaccinations is important because the renewed shutdowns are creating a drag on economic growth. Friday's report of a 140k drop in December Payrolls showed a massive hit to the restaurant industry in particular. The ban on indoor restaurant eating will likely show up in this week's December Retail Sales Report, as well. Consensus looks for a decline in December Retail Sales (-0.2% m/m Total, -0.1% Ex Auto). Consensus also sees a soft 0.1% m/m for December Core CPI, but with the Total +0.4% as a result of higher gasoline prices.
To be sure, the bulk of the economy appears to be reviving well. Excluding the -498k Leisure and Hospitality workers, December Payrolls rose 358k. In particular, Retail, Manufacturing and Construction sectors posted sizable gains in jobs.
Consensus looks for about -12.0% (y/y) for Q420 S&P 500 corporate earnings, versus -8.2% in Q320. But, the macro evidence has mostly improved in Q420 from Q320, arguing against a worsening in earnings. Real GDP Growth on a y/y basis is not down as much, nor are oil prices. The trade-weighted dollar has turned negative while economic growth approved outside of the US. Both should lift earnings abroad. US profit margins are probably little changed. While Average Hourly Earnings remained high in Q420, the 3 latest quarters were probably boosted by compositional shifts away from low-paid jobs, as the latter were hit hard by the virus-related shutdowns.
Markit
Eurozone Real GDP Oil Prices Trade-Weighted
Dollar AHE Core CPI PMI
[ y/y percent
change ] (level)
Q118 2.6 +21.5 -6.6 2.7 1.9 59.1
Q218 2.9 +41.0 -1.8 2.7 2.2 55.9
Q318 3.0 +45.4 +5.1 2.8 2.2 54.3
Q418 3.0 +6.7 +6.5 3.3 2.2 51.7
Q119 3.2 -12.8 +7.9
3.2 2.1 51.9
Q219 2.7
-12.2 +5.9 3.1 2.1 47.8
Q319 2.1 -19.2 +3.6 3.2 2.3 46.4
Q419 2.4 -3.6 +1.7 3.2 2.3 46.2
* Based on the Atlanta Fed Model's latest projection of +8.7% (q/q, saar).
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