Before The Bell - On an historic and very troubling day for the United States of America, where political protests turned into civil unrest on Capitol Hill, the U.S. stock market, which started out in mixed fashion, delivered strong gains during the middle day of the trading week, save for some of the big technology stocks. The investment community also looked past, at least for the moment, the election results from Georgia that will change the balance of power in the Senate. Leading up to the runoff elections, investors were worried that if Republicans lost control of the Senate—and there was no divided government in Washington D.C.—it would lead to more regulations and possibly higher taxes for corporations, neither of which is viewed favorably by Wall Street.
The events of the last few days have produced some major sector rotation in the U.S. equity market, with the biggest losers being the major technology stocks. The tech-heavy NASDAQ finished the session 0.6% lower, while all of the other major indexes finished with notable gains. The Georgia development brought fears that the tech giants may now face tougher regulations in the coming years and may see higher tax bills if President-Elect Joe Biden (Congress certified the election results late last night after returning to Capitol Hill) follows through on his campaign promise to raise the corporate tax rate. Our sense is that once the nation gets through this trying period of unrest, the regulation and tax questions will come into the spotlight, which ultimately may not be good news for some of the higher-growth stocks. Thus, we saw some major rotation out of the big tech names and into the small-cap sector. The small-cap Russell 2000 climbed 4% on the day.
With equity market valuations looking quite frothy right now and a lot of uncertainty lying ahead, we would not be surprised if there is continued rotation out of the high-growth areas, like big tech, which performed very well in 2020, and into the value areas. The stocks tied to the infrastructure space may garner Wall Street’s renewed interest, as many pundits think President-Elect Biden will spend in this area in an attempt to boost an economy that has recently shown signs of slowing; just minutes ago we learned that initial unemployment claims rose to 782,000 in the week ended January 2nd. We would also give the alternative energy stocks a longer-term look. That said, the oil sector has done well recently even with an incoming Administration that will likely be less friendly to its participants. That is because Saudi Arabia said this week that it would unilaterally cut one million barrels a day of crude production starting next month. This decision has given a boost to both crude prices and oil stocks, both of which were weak in 2020. Among the 10 major equity groups yesterday, the oil sector was the biggest winner by a country mile, delivering a more than 4% advance for the session. On the negative side, this move likely signals that the kingdom is worried that a resurgent coronavirus is threatening global economic recovery and the need for oil.
So why are stocks continuing to fare very well when there appears to be growing uncertainty and escalating concerns about the resurgence of the coronavirus around the globe? The answer here appears to be an easy one. Quite frankly, investors these days have very few attractive alternatives to equities. The historically accommodative policies for the Federal Reserve, pumping trillions of dollars of liquidity into the financial system, to combat the economic devastation from the coronavirus pandemic, has pushed rates on fixed-income securities to historical lows over the last 10 months. Against this backdrop, the most prudent strategy may be to stay notably invested in equities, but, as indicated above, look at the value stocks that underperformed in 2020, some of which may get a boost from the likely change in policies on Capitol Hill in the next year.
Before the market’s open, the equity futures point to some more buying when trading commences stateside. Investors continue to throw some caution to the wind. So far today, trading overseas has been bullish, as the main indexes in Asia, save for Hong Kong’s Hang Seng, finished higher overnight, and the major European bourses are in positive territory as trading moves into the second half of the session on the Continent. Stay tuned. – William G. Ferguson