Bulls Sturdy but Vulnerable

Stocks flew around like hummingbirds in a hurricane Thursday as investors expressed a modicum of optimism over the progress of vaccination and the fiscal stimulus package aimed at Covid relief, notes Jon Markman of Pivotal Point.

The Dow rose 300 points, or +1%. The Nasdaq 100 climbed 0.7%, while the S&P 500 added 1% as all 11 sectors closed higher.

Breadth favored advancers over decliners 5-3, and there were 180 new highs and 21 new lows. New highs included Microsoft (MSFT), Abbott Labs (ABT), Blackstone (BX), Illumina (ILMN), and T. Rowe (TROW). The big boys were back.

One source of gaiety came from data: Manufacturing activity in the Midwest rose in January as the region continues to recover from the pandemic, according to the Federal Reserve Bank of Kansas City. The regional Fed branch said Thursday that its composite manufacturing index rose three points from December to 17 this month.

"Regional factories reported more growth in January," said Chad Wilkerson, economist at the Kansas City Fed. "COVID-19 vaccination is a key factor in manufacturers' overall business outlook for 2021, but with less impact on hiring and capital spending in the near-term."

The world's top economy has seen an uneven recovery during the outbreak as cases have surged in recent months. According to the Centers for Disease Control, nearly 21.7 million people have received one or more doses of the two vaccines currently approved for use in the US.

The bank's survey asked companies about the possible effects of widespread COVID-19 vaccinations on business activity, with 93% saying inoculations are important to their overall outlook for business this year.

"Many contacts remarked on the need for a vaccine for both workers and consumers to increase business," the Fed said. "Contacts also noted that continued COVID-19 outbreaks or related government shutdowns would have a significant negative impact in the near-term."

According to the bank, 14% said the vaccine rollout has had a negative impact on their plans for 2021 because the rollout has been slow. Meanwhile, 8% said the rollout has positively affected their hiring plans for later in the year. Some 15% said the vaccine has had a negative effect on their capital spending plans this year, driven by delays and uncertain demand from customers, and 14% said the rollout has had a positive effect on their spending plans.

Bottom Line: It’s great to see hard and anecdotal economic data pointing in the right direction, but for the moment there is a disturbance in the force as investors’ confidence is undermined by attacks on the scaffolding of markets. There is an anti-establishment mood in politics that is spilling into Wall Street, and that’s not good for the status quo because successful trading demands a sense of fairness and respect.

 I’ve been noting for weeks that Januarys can be funky, and even though the S&P 500 (SPX) hit a new record high this week we can see that breadth and liquidity data are crummy enough to suggest that larger investors are taking a back seat and waiting for lower prices. That’s not so bad but looking farther down the road, weak Januarys tend to lead to weak years in equities.

With the Fed and fiscal policy pumping money into the system it’s hard to believe that this could be a lost year, but stranger things have happened. Friday’s action will make or break the month; stay tuned.

Learn more about Jon Markman at Pivotal Point.