What Happened Last Week
There were a number of interesting sound bytes from the week past, but nearly all financial news was overwhelmed by the rather remarkable journey of the stocks of GameStop (#GME), #AMC, #NOK, and others. I covered the GME saga in a mid-week post in this blog (“Shorts and GameStop”) and have tweeted extensively about it, so enough said on this topic for now aside from saying that – if you want to really get “in the trees” – I suggest that you read Matt Levine’s (#Boomberg Opinion) very good article on GME that was released yesterday, which you can find here: “GameStop Stock Game Got Stomped”.
Global equity markets ended down this week between 3% and 4% almost across the board, with further risk remaining on the downside. The culprits seem to be a combination of uncertainty over the direction of the virus and implementation of vaccines, toppy valuations and mixed economic data.
Similar to the headline-grabbing GameStop saga, there is plenty in the mainstream press about COVID-19, but in summary, vaccines are proceeding successfully in the UK and perhaps to a lesser extent in the US, with the EU struggling to get a coordinated approach across the bloc. The EU is looking across the Channel at the UK with some contempt at the UK’s success to date so far in terms of its vaccine rollout whilst the EU lags. As a result, the EU has implemented controls on vaccines manufactured in the EU to ensure that the vaccines produced there are used in the EU first, not exported. This row aside, lockdowns across Europe and some of the harder-hit US states seem to be having their intended effect as far as reducing the R-factor, and new vaccines from Novavax and J&J – reported yesterday – will add to the global vaccine arsenal.
The Federal Reserve, following the ECB and BoJ the week before, released the minutes of their most recent FOMC, and nothing changed as far as the Fed Funds rate or the QE programme. As Chairman Powell emphasised in a press conference following the release of the minutes, the Fed will continue with its stimulus programme until inflation rises to consistently above 2% and the economy reaches “full employment.” One thing is for sure – the US will grow faster than Europe because the US has unleashed much more aggressive and accommodative fiscal and monetary stimulus to address the pandemic-related slowdown. This is clearly showing already in some of the December / 4Q2020 economic data that is being released. 4Q2020 GDP for the US last week was 4.0% annualised (on consensus). For the full year 2020, real GDP decreased by 3.5% in 2020 (i.e. vs. +2.2% in 2019), resulting in current-dollar GDP in 2020 of $20.9 trillion (see “Bureau of Economic Analysis” press release here). In the UK, unemployment in December increased modestly to 7.4%, as the UK economy continues to struggle, dealing with high cases of COVID-19 and “going at it alone” post-BREXIT.
Against this backdrop, 4Q20 (calendar) earnings continue to pour in for European and US companies, and in most cases, the results have been solid. Three more of the FAANG+M companies reported this past week – #AAPL, #MSFT and #FB – and they all beat consensus expectations. In retail food, it was the story perhaps of two extremes, with #SBUX having solid same store sales growth in China offset by declines (-5%) in the US, whilst #MCD had better-than expected (and impressive) same store sales growth in the US and less negative same stores sale growth than expected internationally, although the company missed top line and earnings consensus figures. The airlines (#AA, #JBLU) lost less money than expected. #TSLA more or less met its volume target in 2020, selling 500,000 vehicles, and the company beat consensus revenues but missed its earnings targets. The company also said that its average price/vehicle fell 11% as the company shifts towards more affordable models. In Europe, luxury brands companies LVMH and Kering had strong results, as did UK drinks company Diageo. According to Refinitiv in their most recent report (here), 84.2% of the 184 S&P 500 companies that have reported earnings so far for 4Q2020 have beat consensus expectations, compared to the usual beat of around 65%. Once all the earnings come in, overall (pandemic-affected) 4Q20 earnings for S&P 500 companies are expected to be only 1.6% lower than 4Q19 earnings, a percentage that has been steadily revised upwards as strong earnings reports for 4Q20 have been released. Consensus figures for 1Q2021 are pointing towards substantial earnings growth of 19.7% against the 1Q2020, when the pandemic began to shudder economies. Similarly, earnings growth for 1Q21 has been steadily revised upwards. The forward P/E for the S&P 500 for 2021 is 22.1x.
As the week proceeded, the tone in the financial markets became decidedly more risk off. VIX broke out of its low 20s area range, where it had been anchored for months, going as high as 37.21 intraday on Wednesday, and the volatility index remained elevated throughout the week with the VIX closing at 33.09. Gold weakened into the end of the week, closing down 0.5% at $1,843.90/oz. US Treasuries were flat on the week, although shorter-dated maturities were slightly better. The Yen was stronger, and the US Dollar bucked it’s recent trend and also strengthened. Credit spreads tightened slightly in BBB but both yields and spreads were wider in high yield as investors reduced risk in the riskier segment of the corporate debt markets. WTI Crude oil was slightly better on the week. Time will tell if this is just a temporary response to a bit of unexpected turbulence In the US equity markets this past week or an inflection point.
The Week Ahead
Headlines and focus will continue to be on GameStop and similar heavily-shorted names early next week, almost certainly a topic that the US Congress will consider between cabinet confirmations and an impeachment hearing. The SEC has also promised a review. It is fairly clear that an additional round of fiscal stimulus in the US is not coming anytime soon, and when it does, it will not be $1.9 trillion, the headline figure advertised by the Biden Administration. Earnings continue in droves this week, and hopefully, they will continue strongly, sufficiently positive to provide a counterweight to the suddenly negative sentiment that took hold this week. Companies reporting including the likes of tech/payment companies #AMNZ, #GOOG, #PYPL and #QCOM; pharma companies Merck and Pfizer; oil companies ExxonMobil, Shell and BP; Ford, and a slew of other companies in the US and Europe. I will also write on some of the newer high flying tech names which are reporting earnings Feb 1-5 at the beginning of the week, so keep an eye out.
As I have said several times, my feeling is that we are destined to drift sideways – at least in the US – as earnings need some time to catch up with historically high valuations. The reflation trade is likely to resume once the direction of the pandemic shifts and investors again search for value, meaning lower P/E names (many SME’s), sectors that will benefit from an economic recovery (i.e. cyclicals), and cheaper or faster growing international markets. There is a smattering of January economic data that will begin to trickle in towards the end of next week, including US unemployment for January. Also, the Bank of England will release their Monetary Policy Report and minutes from the last BoE meeting on Thursday.
COVID-19 Progression Table
As you can see in the table below, January (so far) has had over 19 million new cases of COVID-19 and nearly 400,000 deaths globally. Nearly 25% of all COVID-19 cases (26 million to date) have been in the U.S. Detail on the location of COVID-19 cases and deaths can be found on the Johns Hopkins COVID-19 website here. It is worth checking out.
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