Record Highs Greet the New Year - Jan 11, 2021

On Thursday, the Dow Jones Industrial Average, the Nasdaq Composite, and the S&P 500 Index all closed at record highs, surpassing, 31,000, 13,000, and 3,800, respectively, according to data provided by MarketWatch. The indexes added to gains on Friday.

Investors simply ignored Wednesday’s chaos that played out on Capitol Hill. Why?

The fundamentals that are driving stocks have yet to change. While Treasury bond yields are creeping higher, interest rates remain low, which encourages yield-starved investors to look elsewhere for returns (including stocks). Plus, new stimulus money is being delivered.

Despite a disappointing employment report on Friday, few expect a 2021 Fed rate hike, and most analysts and investors believe the economy will expand this year, albeit unevenly.

Second, the Georgia Senate results suggest that Congress will pump new money into the economy.

Wait a second, doesn’t a unified government mean taxes will rise, potentially slowing growth? Wasn’t that the story in November when conventional wisdom suggested the Republicans would win at least one Georgia Senate race?

Instead, investors grabbed a hold of the idea that a Democratic Congress will pass new stimulus money, which would be a short-term benefit for the economy. Yet, the narrowest of majorities in the Senate will require compromise. How this unfolds is uncertain.

Additionally, how the Biden tax proposals might wind their way through Congress are unknown. But the odds of a tax increase for wealthier taxpayers and corporations are higher than before the Georgia runoff.

That said, some of the buying may simply have been technical factors related to the new year, as short-term bullish momentum boosts stocks. It may have had little to do with Georgia.

Further, investors exited 2020 in an optimistic fashion. Optimism breeds optimism, which in turn may breed excess optimism, at least over the shorter term.

Lockdowns hamper payrolls

Nonfarm payrolls fell by 140,000 in December, the first decline since April (U.S. BLS), while the unemployment rate held steady at 6.7%.

Included in the data was the loss of 498,000 jobs in leisure and hospitality. Within the leisure and hospitality category, restaurants and bars shed 372,000 jobs.

The surge in daily Covid cases forced new restrictions and lockdowns in parts of the nation. While the increase in Covid cases and deaths are incredibly discouraging and well above what we experienced in March and April, the economic impact has been far less.