December could turn on potential vaccine approvals, beginning of distribution
Holiday shopping also expected to be in focus as surveys disagree on spending mood
Payrolls watch is on after several months of slowing growth and recent weak data
After the whipsaw year we’ve had, many investors would probably be just fine with a dull December.
There are signs they might get it, with many of the rough spots receding. The election was almost a month ago, earnings season is practically over, and, perhaps best of all, vaccines appear on the way. All this helps explain why the Cboe Volatility Index (VIX), sometimes seen as the market’s “fear gauge,” recently tested post-pandemic lows.
Nothing’s guaranteed of course, and it could all change on a dime. But remember that the holiday period tends to feature lower-volume trade that’s sometimes a bit easier on the stomach. And considering that this year featured both three-year lows and all-time highs—within weeks of each other—many investors would probably look forward to their socially-distanced holiday gatherings without wild Wall Street swings to worry about.
This doesn’t mean there’s nothing going on this coming month. A Fed meeting, a smattering of key earnings reports, possible vaccine approvals, the return of Boeing’s (BA) 737 MAX, and, of course, growing concern about the new worldwide wave of virus cases could keep things interesting.
“Seasonals” are also something to potentially watch. Typically there’s a lot of “window dressing” by fund managers during December, meaning they sell the year’s losers and buy winners to make their portfolios look a bit more attractive in those end-of-the year mailings to clients. Also, don’t forget there might be a visit from Santa Claus. Markets often (though not always) rally during the week between Christmas and New Year’s.
The old adage is “never sell a dull market.” We’ll see if the dullness holds and if investors take note of that saying.
Pendulum Swings Between Virus Hope and Concern
As 2021 approaches with hopes for a return to normal, Wall Street feels like it’s treading water. There continues to be a balance between optimism over what the vaccines can ultimately mean and concerns about how quickly they can come to market and get widespread distribution.
There’s still a lot of money on the sidelines parked in money market accounts, analysts said. It’s unclear what it might take for investors to put some of that back to work. Recent catalysts included three consecutive Mondays in mid-to-late November when markets burst out of the gate on positive vaccine efficacy data. Some of those catalysts could continue in December if medical experts are right about the possible quick U.S. government approval of Pfizer (PFE) and BioNTech’s (BNTX) vaccine, possibly followed soon after by Moderna’s (MRNA). Wall Street also awaits data on a vaccine from Johnson & Johnson (JNJ), while recent approvals of COVID-19 treatments raise optimism, too.
If vaccine approvals occur, each could potentially give investors new confidence, especially if the approvals are followed by companies quickly getting the products into circulation. As of late November, some U.S. government officials were predicting that vaccines could become available to some by mid-December. While that’s great to hear, you can never tell if it ends up being a “buy the rumor, sell the news” kind of scenario. Also, vaccines will take many months to fully roll out to wide populations.
Even if the vaccine news isn’t enough to be a big catalyst, consider this: Right now, you could argue that the major indices enjoy a “vaccine put”—kind of like the “Fed put” they already had. The “Fed put” is an expression that got popular when the Fed kept rates near zero for years to allow the economy to recover from the Great Recession. Investors then (and now) felt reassured that if something bad happened, the Fed would have the market’s back. Now if something bad happens, there’s hope that a vaccine or two on the near horizon could keep a nice net under the market, too.
That isn’t assured, but it’s hard to argue against it judging from recent action on Wall Street. None of the major indices have made any sort of serious test of long-term technical support levels recently after bouncing off them back in September and October. The dramatic and sudden bear market last March happened when no one knew how bad things could get. The feeling now is, they might get worse in the short term, but the medical companies, scientists, and governments have managed to blunt some of the uncertainty. This could mean stocks continuing to find buyers on any moves lower through December.
All this doesn’t mean investors should get ahead of themselves and think the suffering is over. Far from it. The data lately haven’t been as positive as in mid-2020, perhaps reflecting the end of government stimulus.
How likely is a fresh stimulus by the time holiday shoppers start getting their credit card bills in mid-January? Probably not very. The new Congress will have just been seated and the new president won’t be taking office until Jan. 20. The issues under debate aren’t easy, or there would have been a second stimulus way before now. A new Congress means a new debate, and winter is going to likely be a tough time for our country if shutdowns continue. It’s certainly possible we could see a stimulus approved sometime in Q1, but even then, it takes a long time for that money to work its way through the system, so Q2 could be slow, too.
Perhaps with that in mind, some of Wall Street’s big firms predict slower economic growth in coming months. Fund manager BlackRock recently upgraded U.S. equities to overweight, but called for a “nuanced approach” due to the virus impact on the economy.
Meanwhile, JP Morgan (JPM), predicts negative Q1 growth. “This winter will be grim, and we believe the economy will contract again in 1Q,” JPM economists wrote in their recent outlook, reported by CNBC. JPM projected that Q1 growth will contract by 1% after growth of 2.8% in Q4. Their Q4 growth estimate, by the way, would be well below the massive Q3 growth of more than 30% estimated by the U.S. government.
FIGURE 1: NEEDLE UNMOVED. While both the S&P 500 Index (SPX—candlestick) and the Nasdaq 100 (NDX—purple line) made strides in early November on vaccine news and in post-election trading, they’ve flattened out pretty clearly over the last few weeks. Worries about slowing economic data might play a role. Data sources: Nasdaq, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Mark Your Calendar
Here are a few data and events to watch for in November.
|Dec. 1||ISM Manufacturing|
|Dec. 4||U.S. Jobs Report|
|Dec. 10||Consumer Price Index|
|Dec. 11||Producer Price Index|
|Dec. 11||Michigan Sentiment- Prelim|
|Dec. 16||Retail Sales|
|Dec. 17||Housing Starts|
|Dec. 22||Existing Home Sales|
|Nov. 24||Consumer Confidence|
|Dec. 24||Durable Goods|
|Dec. 23||New Home Sales|
|Dec. 23||Michigan Sentiment – Final|
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A Shopping Season Like No Other
Ah, but what about December itself? It’s most likely to be shaped by vaccine news, though you can’t count out the chance of holiday spending having an impact. The month will start with investors getting word on how Black Friday and Cyber Monday sales went, and those numbers could help determine December’s early tone. With many stores possibly counting on driveby pick-ups and online shopping for the bulk of their Black Friday sales, Cyber Monday could be more important than ever.
With the holidays straight ahead, you don’t have to search very hard for experts predicting what sort of shopping season the country is likely to have. However, there’s no real consensus. For instance, a Master Card (MA) survey said 59% of shoppers plan to spend the same or more on holiday shopping this year than last, while a separate survey by Goldman Sachs (GS) found that around 53% of 1,000 consumers plan to spend less this holiday season—including 20% who said they planned to spend “substantially less.”
The shopping period can likely make or break Q4 GDP, but there’s more to it than simply buying gifts. With travel expected to be way down because of the virus, other parts of the economy like airlines, cruise ships, casinos, and restaurants could continue to sputter even if people spend more on presents. And the real reckoning might come in mid-January when consumers start to get those credit card bills in the mail, especially if there’s no government stimulus by then.
Every time there’s been good vaccine news lately, travel and other “back to normal” stocks bounced and Tech stocks took a backseat. This “reopening” trend has helped cyclical and “value” stocks make decent gains over the last month while Tech lagged. Meanwhile, continued general strength in the bond market has kept pressure on yields and seems to be helping some of the so-called “bond proxy” sectors, namely utilities.
December nears with the average S&P 500 dividend yield near 1.6%, or nearly twice the 10-year Treasury yield. One way investors can track optimism is to keep an eye on this nearly two-to-one ratio. If it narrows, that may be the best indication of market sentiment turning more positive.
Another sentiment barometer we always talk about in these monthly outlooks is volatility. it would be easy to say it’s less of a factor approaching December, with the VIX spending most of its time recently below 25 but above the historic average near 20. That wouldn’t be the full story, however, because VIX futures indicate less complacency.
It is interesting to see futures traders expecting VIX to rise toward 26 by February. Again, that sounds relatively low if you think of it in the context of VIX being 80 earlier this year. However, a VIX at 26 would have been considered pretty high in pre-pandemic days, and suggests that a lot of uncertainty remains built in that might hinder any quick re-tests of recent stock index highs.
Payrolls, Fed Meeting Offer Breaks from Vaccine Watch
December’s jobs report feels like a big one. As investors await Dec. 4 payrolls data, they’re fresh off seeing retail sales come in below expectations in October and new weekly jobless claims rise in mid-November for the first time in more than a month. The housing market still looks solid, but there’s concern this coming payrolls report could reflect slower jobs growth as virus-related shutdowns affect more businesses and stimulus dwindles.
The three-month average for total nonfarm payrolls growth fell to 934,000 in October from 1.309 million in September. Consider keeping an eye on the three-month average once November gets factored in, because it’s a better trend indicator than any single month by itself. A bad jobs report might put more pressure on Congress to approve stimulus before 2021.
There’s also a Fed meeting Dec. 15–16, which will include the Fed’s rate outlook for coming months and years. Investors might want to closely examine the Fed’s predictions for the farther-out years to see if anyone thinks rates might start to rise a bit sooner than they previously had forecast. Remember, the last time the Fed issued projections, in September, no one knew how long it might take to develop an effective vaccine. Now there’s talk that the economy might grow quickly enough in 2021 to bring inflation back into the picture, though the Fed has said it plans to let inflation trend above 2% if necessary to get unemployment down.
Inflation hasn’t been a problem recently, except that it’s too low for the Fed’s liking. Part of that hinges on cheap crude, though crude traded near its recent highs of around $43 a barrel as November wound down. OPEC is expected to meet in early December, and analysts believe members will keep their current cuts in place rather than ease them. One reason is heavy production out of Libya that’s put pressure on prices, along with demand worries in the U.S. and Europe due to the current virus wave.
While no one can say for sure what OPEC might do, one area with more certainty now is U.S. politics. Well, a little more certainty. There are still two Georgia Senate contests to settle in early January that could determine who controls that legislative body in 2021 and 2022. President-elect Joe Biden gets sworn in soon, but with Republicans making gains in the House and with chances to hold the Senate, there’s probably not as much concern in December about possible tax implications of a Democratic administration. That could mean a little less selling pressure in the coming month than might have been the case with a “Blue wave,” because people might not be as worried about capital gains and corporate taxes rising next year.
Still, be ready for possible maneuvering as the new year approaches and some major funds start to lock in gains or sell losing stocks. Can a Santa Claus rally occur even if St. Nick has to wear a mask when he slides down chimneys? December will tell us, as a year like no other wraps up.