The Week Ahead – What Happens When the Game Stops?

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

Month 1 done, 11 months to go. After a week like last week and a month like January, all I can think of is of Russel Crowe’s Academy Award winning character from the movie Gladiator, Maximus Decimus Meridius, declaring after an action packed sequence in the arena, “Are you not entertained?” Civil unrest at our Nation’s Capitol Building. Confirmation of the Electoral College’s votes. Georgia’s Senate runoffs. Presidential impeachment 2.0. Social media bans. A new President inaugurated. A blue wave. Additional stimulus. Vaccine administration. SPACs. Bitcoin. Reddit. GameStop. Short squeeze. Robinhood. Day-trading like it’s 1999.

Somewhere, lost in the daily noise, is that earnings season for publicly traded companies has been going on for the past few weeks. As of last Friday, 183 S&P 500 companies representing 57% of total earnings have reported their 4^th quarter results. Earnings per share is currently running about 10% above consensus estimates and 9 out of 10 S&P 500 companies have beaten their consensus expectations.  The proportion of beats has also been among the strongest in history, with 68% of reported companies having beaten on both sales and EPS. The reward by stock market investors for exceeding expectations? A historically bad reaction, with companies who have beaten on both sales and EPS down about 0.5% one day after reporting.

Corporate sentiment remains strong and capital expenditures seems to have bottomed. However the headlines have been focused on companies that have been stuck in a short squeeze battle between retail investors (in particular Reddit Robinhooders) and hedge funds. Lost in the irony of this battle is that many of the primary investors within those long-short hedge funds are institutional investors such as pensions and endowments. We’ve seen other eclectic asset classes and companies over the past few years ride the social media trading train: cryptocurrencies (one thing to note, the world’s largest democracy, India, plans on introducing a law banning cryptocurrencies and to lay the framework for a central bank issued digital currency), Hertz, Kodak, SPACs, etc. For most people, real wealth is obtained through concentrations. For the majority of people, that would be a concentration in one’s career and job. For others it could a concentration in an asset such as real estate or a single stock. FOMO, fear of missing out, is human by nature. We’ve all seen Elon Musk turn into the world’s richest person in a very short time (hint: concentration in a single stock). Today, more and more investors are acting more like traders looking to punch in a lucky lottery ticket than to accumulate wealth over time with proper risk management. It’s gotten to the point where the U.S. Securities and Exchange Commission has put out an article on the subject relating to hot stock trading.

In the week ahead, we’ll get an update on the current employment situation as well as a check in on manufacturing and services. So far we’ve seen pretty strong correlations between Covid-19 cases and economic data releases. In the long run, earnings and fundamentals are what drives valuations and speculative investing has been around just as long as the stock market. For some additional thoughts please see our latest investment commentary, Beacons of Hope.

Data deck for January 30–February 5