Well, there’s good news and bad news this morning. Let’s get the unpleasantness out of the way before looking at causes for optimism.
Coronavirus worries have ramped up over a new strain of COVID-19 that seems to spread faster. In response, European governments have ratcheted up restrictions designed to stem the spread of infections but that also pose economic risks, helping to send European shares lower overnight.
Those worries spilled into premarket trading in the U.S. as the familiar concern about the virus’ effect on the economy comes back to the fore, and travel-related stocks are taking it on the chin. Investors are seeking the relative safety of U.S. government debt and the dollar and shunning riskier assets like oil. Gold, typically a safe-haven play as well, was down because of the higher dollar. Wall Street’s main fear gauge, the Cboe Volatility Index (VIX) was up nearly 40% at one point.
The rise in the greenback was particularly acute due to the new restrictions in Europe—especially in Britain, as fresh lockdowns come amid a looming Brexit deadline, with key details yet to be finalized. As Britain pulls inward, the likelihood of a “no-deal” departure from the European Union at the end of the month becomes more likely.
Maybe More Than Silver Linings
But not all was doom and gloom, as there has been some good news that currently is getting overshadowed by the virus fears.
On Sunday, Congress struck a deal on a $900-billion coronavirus stimulus bill that, if passed, will involve direct payments and jobless help for Main Street. Wall Street has been hoping for such a measure for a while, with the thinking that stimulus could help boost consumer spending and give the economic recovery a shot in the arm.
Speaking of shots in the arm, immunizations with the Moderna (NASDAQ:MRNA) vaccine were expected to start today after the Food and Drug Administration authorized it for emergency use on Friday. This second emergency COVID-19 vaccine received the emergency go-ahead a week after one developed by Pfizer (NYSE:PFE) and BioNTech (NASDAQ:BNTX).
The two vaccines that are reported to be highly effective seem to offer a light at the end of the tunnel and potential closure on a tragic chapter in world history. But it’s important to remember that the vaccines won’t be available for widespread use for some time, meaning countries in the northern hemisphere will likely have to endure more hardship—and ratcheted-up government efforts to curb the spread—during the coldest months of the year.
Still, the hope on Wall Street has been that a vaccine, once widespread, will help boost consumer spending and increase the pace of the economic recovery.
After the good news on the vaccine and stimulus fronts, equity index futures actually opened higher on Sunday before succumbing to worries about the new UK virus strain, indicating that there is some positive sentiment underneath the fear.
Electric Week
It remains to be seen how long the current selling will last. In addition to worries about the new strain, there could be some pressure on equities heading into the end of the year from profit taking. But there could also be a buy-the-dip mentality that could end up supporting the market and helping the Santa Claus rally from last week continue.
If you ducked out early, here’s where we ended: U.S. indices ended in the red Friday as stimulus talks dragged on but pared their losses into the close on stimulus-related optimism.
Friday was also quadruple witching day, one of four trading sessions a year (once a quarter) when contracts for stock index futures, stock index options, stock options, and single-stock futures all expire. Position-squaring in and around witching day tends to make the markets a bit more choppy, but this time there was an extra dynamic: Tesla (NASDAQ:TSLA).
Although shares of the electric vehicle giant rose nearly 6% and hit a record high Friday amid trading related to its inclusion in the S&P 500 Index, they were more than 4% lower ahead of the open. TSLA is the largest single-company addition to the broad index, and funds that track the benchmark have had to add billions of dollars in that stock and sell an equivalent amount in other stocks in the index.
The entry of TSLA into the SPX also will likely have ripple effects for the average investor. Anybody who couldn’t buy the stock can now own some of it by investing in the SPX. TSLA enters the SPX with a nearly 1.7% weighting and a position as the fifth largest company in the index by market cap—even ahead of Google parent Alphabet (NASDAQ:GOOGL). When you combine its size with its history of volatility, TSLA could help make the SPX more volatile.
The economic calendar is relatively light this week. Higher profile data releases include December consumer confidence figures as well as existing home sales data, personal consumption expenditures numbers, and a new home sales report for November. As always during the pandemic, investors will also probably be tuning in to the weekly initial jobless claims report to take the pulse of the labor market, an important indicator for the pace of the economic recovery.
CHART OF THE DAY: FLIRTING WITH SUPPORT. The E-mini S&P 500 Index futures (/ES—candlestick) broke below a support level (yellow line), which is at about 3625. Although the futures recovered some of that drop, the support level is one to watch during the trading day. Data source: CME Group (NASDAQ:CME). Chart source: The thinkorswim® platform from TD Ameritrade (NASDAQ:AMTD). For illustrative purposes only. Past performance does not guarantee future results.
Will Santa Claus Rally Resume? While the stimulus deal is a welcome event on Wall Street, it’s probably worth remembering that there are other tailwinds that may also help keep stocks buoyed. Accommodative fiscal and monetary policy are among the reasons why Kevin Kelly, CEO of Benchmark Investments, thinks the market could continue higher even if a stimulus deal hadn’t been reached. An options market that is signalling lower volatility ahead is also helping to reinforce the Santa Clause rally, he said Friday on the TD Ameritrade Network. The term “Santa Claus rally” refers to a phenomenon where stocks often begin a rally around mid-December that can last into the New Year. And even if there were a market pullback, there are trillions of dollars in cash that investors could use for bargain hunting, which would cushion any downturn, he said.
Swoosh and Click: After the close on Friday, Nike (NYSE:NKE) reported earnings and revenue that beat analysts expectations and raised its fiscal 2021 outlook. Even before the pandemic, Nike was a bellwether for the retail industry. And its latest results offer another glimpse into how COVID-19 has been changing the face of retail. The shoe and athletic wear maker saw Nike brand digital sales increase 84% overall in its most recent quarter, with triple digit growth in North America. That comes as the company continues to experience year-on-year declines in physical retail traffic in North America and other jurisdictions because of COVID-19 and safety-related measures. Nike’s experience is a reminder of how the pandemic has accelerated the trend of more and more retail dollars being spent online.
The New Gold? Bitcoin, the world’s most valuable cryptocurrency, rose above $23,000 for the first time last week as the alternative currency becomes ever more mainstream. Bitcoin’s rise has been aided by PayPal's (NASDAQ:PYPL) announcement that it will let customers buy and sell bitcoin and use it for purchases. It’s also been helped by institutional investors. And there is a school of thought that bitcoin has become, or at least is becoming, a safe-haven investment—a new gold if you will. That argument is bolstered when both bitcoin and gold do well when the dollar slides and there are inflation concerns. But it may be too early to call bitcoin a true safe-haven play, as the cryptocurrency remains very volatile. Until bitcoin settles into less-volatile trading with fewer outsized price swings, investors may be best served to use more caution than they would for investing in gold.