Stock Market Commentary for 12/22/2020:
- U.S. stocks started the week off in the red, as a new strain of the Covid-19 virus and new lockdown measures weighed on investor appetite. The new strain was found in the U.K. with the potential to be more contagious. Italy, the Netherlands, Belgium, and France closed their borders to the U.K. as a cautionary measure. The Stoxx Europe 600 Index slumped 2.33% on the news. The S&P 500 Index dipped 0.39%, and dragged lower by losses for Tesla (which fell more than 6% on its first day of trading as part of the index).
- Winners: Financials got a boost, after the Fed announced it would allow banks to resume share buybacks. Goldman Sachs rallied 7%.
- Losers: Oil producers, airlines, and cruise-line operators were all hit by lockdown news. Exxon Mobil shed 1.9%, American Airlines dropped 2.3%, and Carnival slid 1.3%.
- Congress finally agreed on a new stimulus package. Get all the details in our ‘top story’ below.
- Coronavirus tracker: Per Johns Hopkins, the U.S. reported 188,280 new cases yesterday, and current hospitalizations are at 113,663.
– By Raymond Kanyo
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Top Investment Story #1: Stimulus Round 2
What is Happening?
Congress aims to pass the $900B stimulus package by Monday night. The aid could keep the economy from contracting again. Let’s explore the most prominent points.
Why does this Matter?
Lawmakers couldn’t have waited longer to pass another stimulus package, to prop up a struggling U.S. economy. Jobless claims are at a three-month high, November’s payroll gains were well below expectations, and retail sales declined in both October and November. An even more alarming figure, is the number of long-term unemployed (people jobless for 27 weeks or more), which has increased by 385,000 to 3.9 million.
Enter the $900B stimulus package, which includes:
- $600 of direct payments to most Americans
- $300/week federal unemployment insurance supplement through mid-March
- $284 billion for forgivable Paycheck Protection Program loans, for small businesses
- Federal eviction moratorium extension through January 31
- $15 billion for airline payroll assistance
- $15 billion for live event venues, movie theaters, and cultural museums
Experts estimate that the stimulus package will give a 2.5% boost to 2021 U.S. GDP growth.
Will this stimulus package save airline, travel, movie theater stocks, and companies tied to retail spending? Unfortunately, it’s not likely. However, it should help get through Q1 2021, after which experts expect another round of stimulus to be on the table.
-By Raymond Kanyo
Top Investment Story #2: Good News For Financials, But More To Go
What is Happening?
After recent stress tests from the Federal Reserve, banks are allowed to resume share buybacks. A buyback program is when a company buys their own stock in an open market, resulting in higher earning per share. Many financial sector stocks rallied Monday on the news.
Why does this Matter?
Bank of America, Goldman Sachs, Morgan Stanley, Citigroup, and JPMorgan Chase were all up more than 3% at closing. The fed will allow the resumption of stock buybacks, if the firm’s dividend + buybacks are not larger than their average quarterly income over the last year.
Morgan Stanley (+5.69%) and Goldman Sachs (+6.13%) moved significantly higher than the rest of the financial sector. The two firms leaped ahead in terms of capital ratios. It appears they are the best suited to resume buyback programs at the highest rate.
The stress test and quarterly earnings reports also shed light on the banks that suspended dividends in recent months. It appears that Capital One may resume its quarterly dividend, while Wells Fargo is uncertain.
Moving forward, it will be interesting to see if the Federal Reserve eases limits on the financial sector as a whole. Investors will likely punish banking stocks, compared to the wider market, if such intense capital requirements continue. Most investors currently expect capital ratios to continue to increase, as loan growth remains slow and restrictions on buybacks and dividends remain tied to profits. This can be frustrating for those looking to maximize value on a firm’s equity.
The Fed is taking a slow and cautious approach with banks. Although Monday’s news was certainly good news for shareholders, the best may be yet to come.
– Written By Jack Dunne