21 Dec Capital 19 Catch-Up

Wall Street Awaits Stimulus Package As The Fed Come To The Party And Apple Indicates Increase In Demand

We were teased all week about an impending $900 billion stimulus package that would accompany a $1.4 trillion spending bill, with leaders from both sides saying that they were “optimistic” and “making progress”. In the end, however, it wasn’t to be, but the optimism surrounding the negotiations were enough to keep stocks in the green for another week.

The main market movers were the same they have been throughout December. The number of coronavirus cases and related deaths remain at critical levels, with the rolling average of cases clearing 215,000, and the number of deaths standing at approximately 2,400 per day. But in the background, we know that multiple vaccines have promised to end the virus and it is only a matter of time before things are back to normal. So the race against the clock continues, but the market – looking forward as it always does – is not showing any signs of panic.

The Fed stepped up where Congress couldn’t through the week and guaranteed the continuation of bond purchasing. They’ve committed to buying at least $120 billion of bonds each month for the unforeseeable future, and are willing to increase purchases if the economic recovery slows. The bond-buying will continue “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” That means inflation needs to be more than 2%, which you would imagine won’t be occurring for quite some time. The good news for us as stockholders is that rates will be remaining at all-time lows until at least 2022.

The support will be necessary in the coming months as local regions shut down amidst rising cases and household income decreases. New York was the latest to warn of impending lockdowns as they experience a number of cases not seen since the shutdowns in March and April. The bad news was reflected in the latest retail sales data which showed a fall of 1.1% in November when analysts were expecting a drop of just 0.3%. The October number was also revised lower to move to a 0.1% fall, rather than a 0.3% gain.

Clothing retailers copped the brunt of the decline, with sales falling by 6.8%. Restaurant and bar sales were also down by 4%, electronic and appliance store sales fell 3.5%, while motor vehicle sales lost 1.7%, and furniture stores 1.1%. Online and mail-order sales rose by 0.2%, while food and beverage outside of restaurants and bars rose slightly, as did those of building materials. The results will likely see a fall in GDP for the months of October and November.

The weekly jobless claims were also disappointing with 885,000 people filing for unemployment benefits through the week. Analysts were expecting the number to be around 800,000 so the increase was a surprise to the market. These levels are the highest we have seen since early September but it is not surprising considering the layoffs that have occurred since the coronavirus took off again around the US. It really highlights how urgently another stimulus package is needed while we wait for the vaccine to be administered.

In stock news, Apple (AAPL) got a nice 6% bump during the week as Nikkei announced they will be boosting iPhone production by 30% in the first half of 2021. The silicon valley giant has requested suppliers build 95-96 million iPhones of both old and new models. The increase should see an increase of more than 20% in 2021, ending three years of consecutive sales declines of Apple’s flagship product. Commentators are putting the increase down to an improvement in demand for the iPhone 12 range which matches competitors 5G offerings. Apple is now up 69% year to date.

Tesla (TSLA) hit all-time highs throughout the week as markets and hedge funds prepared for the electric car maker to be added to the S&P500 later on tonight (our time). It was touted on Friday that passive hedge funds were forced to buy $85 million of the shares before market close, while also offloading $85 million of other stock to maintain their correct weightings. More than 200 million shares were traded, which was four times its daily average.

The stock is up more than 700% in 2020 and it will be the 7th largest company in the index by market cap. You can read more about or thoughts on Tesla (which we recommended buying in February and has risen by more than 500% since) and our May recommendation Ford (F), which is now up by more than 80% in just 8 months, in our report update on Ford under the Catch Up today.

The weekend will be a quiet one leading into Christmas at the end of the week. The market will be closed on Friday and will open again on Monday in the US where the boxing day holiday isn’t recognised. For us here in Australia the ASX will close early on Christmas eve (Thursday) at 2:30 pm and won’t open again until Tuesday. The Capital 19 office will be closed this Friday and the following Monday and we’ll be back on board on Tuesday as well.

There are no big-name companies reporting earnings this week and economic announcements are also thin on the ground. It should be a big week for the banks after the Federal Reserve gave them the green light to start dividends and share buybacks again, while Moderna (MRNA) will be hoping to get final approval on its coronavirus vaccine and join the Pfizer drug in vaccinations programmes across the globe.

I hope you all have a very merry Christmas and keep as safe and socially distanced as possible.

Cheers, Paul.