The stock market is caught between the rapidly spreading virus and the promise of a vaccine.
That is likely to drive trading in the week ahead, as it did in the past week. Investors have been weighing cyclical plays that will do better when the economy reopens fully, against the big tech and growth names that weathered the virus shutdowns in the spring and benefit from the stay-at-home trend.
In the past week, that trade resulted in a mixed performance with the Dow up 4% but the Nasdaq down about 0.5%, as investors sold off technology and communications services stocks. The S&P 500 finished up 2.2% at a record close of 3,585, its first since Sept. 2. The renewed spread of the virus by mid-week had tamped down the exuberance over news from Pfizer Monday that its vaccine has proven highly effective and could be broadly distributed next year.
The election is still uncertain though the market has responded well to the idea that a Democratic president and a mixed Congress will likely result in gridlock. President Donald Trump refuses to concede while his campaign challenges election results. Former Vice President Joe Biden was declared the presumptive president-elect last Saturday and has been moving to organize a cabinet.
"We largely put the election in the rear view mirror. The next hurdle for this market to contend with will be the path of the virus, and that will be the chief focus. It means a less strident rotation," said Art Hogan, chief market strategist at National Securities. "Growth has actually outperformed value for the last 17 years. That's a lot of inertia to break...If this is a pivot point, it's a long-term pivot point."
The surging virus is raising renewed concerns about the economy as some cities are likely to put new limits on activities to slow the spread. In the U.S. there were a record 153,400 new cases Thursday.
Besides the virus headlines, investors will be watching economic data, particularly retail sales Tuesday and existing home sales Thursday. There are a flurry of Fed speakers, including Fed Vice Chairman Richard Clarida Monday.
The Pfizer news and the election outcome combined to unleash a new wave of bullishness early in the past week. Goldman Sachs, for instance, put a target of 4,200 on the S&P 500 for 2021, and JPMorgan said the benchmark could rise to as high as 4,500 next year.
Hogan said the value play trend had actually been underway before the Pfizer news and is what helped take the Russell 2000 to close at a new high for the first time Friday since August, 2018.
Small caps in the Russell 2000 have been outperforming for the past three months. Since Oct. 1, the Russell is up 15.5%, compared to just under 6.6% gain for the S&P 500. In the past week, the Russell was the best performer, up 6% for the week on Friday, compared to the 2.2% gain in the S&P 500.
In the past week, energy stocks surged 16.5%,and airlines were up 10.5%, The S&P financial sector was up 8.2%, with commercial banks gaining 11.2%. At the same time, information technology declined 0.4% and consumer discretionary stocks were down 1.1%. Communications services was among the weak performers, up just 0.8%
"I think it's just a constant tug of war...based on what we see with the virus headlines and such. I think that's driving a lot," said Paul Hickey, co-founder of Bespoke Investment Group. "When you get the bad headlines, you start seeing the growth stocks do well. When you get the good headlines, you start seeing the value stocks doing better."
Hickey expects to continue seeing vaccine developments from other manufacturers. "Some of these high-flying Covid stocks are going to get hit as the headlines get better. We've been rotating out of the large cap tech stocks, but we don't think they're necessarily going to go down, so to speak," he said. "We just think there's better opportunity in some of the more cyclical parts of the market. It's more a function of underperformance than decline."
8:30 a.m. Empire State manufacturing
1:45 p.m. San Francisco Fed President Mary Daly
2:00 p.m. Fed Vice Chairman Richard Clarida
8:30 a.m. Retail sales
8:30 a.m. Import prices
8:30 a.m. Business leaders survey
9:15 a.m. Industrial production
10:00 a.m. Business inventories
10:00 a.m. NAHB survey
1:00 p.m. Atlanta Fed President Raphael Bostic Minneapolis Fed President Neel Kashkari, Boston Fed President Eric Rosengren, and San Francisco Fed President Mary Daly panel on employment
2:00 p.m. New York Fed President John Williams
4:00 p.m. TIC data
8:30 a.m. Housing starts
10:00 a.m. QSS
10:00 a.m. Chicago Fed President Charles Evans
12:15 p.m. New York Fed's Williams
7:00 p.m. Atlanta Fed's Bostic
8:30 a.m. Initial claims
8:30 a.m. Philadelphia Fed manufacturing
8:30 a.m. Cleveland Fed President Loretta Mester
10:00 a.m. Existing home sales
12:35 p.m. Fed Governor Michelle Bowman
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