The economy looks to be stalling. The market, on the other hand, has no brakes.
Payrolls numbers released on Friday were particularly weak. Employers added just 245,000 workers in November, below expectations for 440,000 and October’s addition of 610,000.
“While the virus certainly weighed on job growth, the economy more broadly is simply running out of steam,” wrote Natixis CIB U.S. economist Troy Ludtka.
Nonetheless, all four major stock indexes rose to record highs on Friday, the first time that’s happened since November 2018. The Dow Jones Industrial Average rose 1% during the week, to 30,218.26. The S&P 500 index gained 1.7%, to 3699.12, and the Nasdaq Composite increased 2.1%, to 12,464.23. The small-cap Russell 2000 advanced 2%, to 1,892.45.
Even Bitcoin got in on the action, hitting a new all-time high of $19,920 on Tuesday.
The unemployment rate fell to 6.7% from 6.9%, but the drop was caused by more people dropping out of the workforce entirely. And the jobs report showed that a key sign of holiday enthusiasm—the hiring of thousands of workers to help with the holiday retail rush—simply didn’t happen this year. Some of those workers—but clearly not enough—are helping with online shopping duties, filling warehouses around the country or driving vans from house to house.
Covid-19 rates are spiking throughout the country, depressing economic activity. Vaccines may be approved as soon as this month, but they won’t be widely distributed until well into 2021.
So why the optimism? Investors expect Congress will step in to cover part of the gap, passing a stimulus bill before Christmas break. That could tide the economy over and provide a lifeline to workers who are about to lose their unemployment benefits. Congress is considering a bill that could cost $900 billion, although Republicans and Democrats were still at odds about support for cities and states and liability protections for businesses.
The worse the economy gets, the more likely they will come to a deal, some analysts predicted.
“Under the circumstances, it is hard to be a seller of any risk asset as long as there is a good possibility of getting a deal done,” wrote Mizuho Securities analyst Robert Yawger. “You could actually make the argument that bad news is actually now good news because it increases the probability of getting a deal done.”
There’s some cynicism in that viewpoint, but the market is clearly buying it. Stocks dependent on economic growth have been leading the rally, and oil is jumping. U.S.-traded oil briefly hit nine-month highs on Friday, and stocks of producers like ConocoPhillips (ticker: COP) rose more than 5%.
In general, cyclicals and value stocks have outperformed growth stocks since early November.
The S&P 500 returned 11% in November. Value stocks, as measured by low price-to-book values, have rallied 32% in the past month, according to BMO Capital Markets. By contrast, stocks with the fastest five-year earnings-per-share growth rose 10.5%.
A broad basket of value stocks is still down 9% this year, and analysts think that those stocks have considerable room to run as the overall economy improves.
“While the pandemic and the excessively binary investment decisions, and lack of process and discipline that came along with it, are unlikely to fade in the coming months, we remain optimistic heading into 2021 as the economy and society slowly transition back to normal,” wrote BMO Chief Investment Strategist Brian Belski. He expects the S&P 500 to gain another 15% next year after ending this year at 3650.
And yet it’s worth questioning the rally too. Mark Stoeckle, CEO and portfolio manager at Adams Funds, tells Barron’s that some of the big growth names that have lagged now look like smarter bets than the “reopening” names. Yes, cruise stocks may eventually prove their worth, but does it really make sense to buy a company like Royal Caribbean Group (RCL) after a 47% rise since the start of November?
Stoeckle thinks reopening “euphoria” will fade. Delivering a vaccine to billions of people is no simple matter, and the market could buckle on any changes in the timeline. “We do not think this is going to be a straight line,” he says. Stoeckle is gaining a newfound appreciation for stocks like Microsoft (MSFT), which is down 8% from its highs earlier this year.
“I think that many of these reopening stocks have gotten ahead of themselves,” he says. “I think that the market has punished some of the big tech stocks too much.”
The market punishing big tech stocks? There’s a first time for everything.
Write to Avi Salzman at firstname.lastname@example.org