Worldwide economic lockdowns to fight COVID-19 continue to hamper economic recovery. Last week, U.S. economic results were mixed—unemployment claims came in at 900,000, while the Atlanta Fed slightly raised fourth-quarter GDP estimates from 7.4% to 7.5%. Despite economic weakness, the U.S. financial markets continue to head higher on the expectation of strong fourth quarter earnings. As a result, the S&P 500 was up 1.9% last week, while the Dow Jones Industrials advanced 0.60%. Even more impressive, the NASDAQ catapulted 4.1% higher, and the Russell 2000 (small company stocks) ended the week 2.1% higher.
Many companies, especially foreign and multinationals, continue to benefit from a weaker U.S. dollar. This has provided a positive boost to many companies in the S&P 500, as nearly half of S&P 500 sales come from outside of the U.S. As always, the markets continue to favor companies with strong earnings and sales. Over the past several months, the market rally has been broad based, but we do expect the market to become narrower as investors zero in on fundamentally superior companies that can maintain strong earnings momentum.
Our F-E-V-R-R process focuses on finding these very types of companies. A large portion of our process involves seeking companies with robust forecasted average annual sales growth and impressive forecasted average annual earnings growth.
Another big development last week was the swearing in of a new administration. One of the biggest benefactors was technology stocks, as evidenced by NASDAQ soaring over 4% higher to new all-time highs.
Investors are expecting the Biden administration to be friendlier to technology companies in the coming months and years. As you know, our portfolios have been heavily technology-focused over the past couple of years, and this has aided results.
We also expect technology companies to stay in favor for years to come as more people work remotely and seek to find entertainment at home. Prior to COVID-19, the work-from-home trend was already accelerating. With the global lockdowns forcing people to work from home, the increased productivity has led many employers to be more welcoming to their employees working from home, even after the pandemic subsides.
Wall Street analysts are expecting a robust earnings season for some of the best companies in the sector. It is already happening for the majority of S&P 500 companies. In fact, FactSet Research recently noted that of the 26 S&P 500 companies that have reported results thus far:
With the fourth quarter earnings season off to a good start, combined with how our portfolios are currently positioned, we are excited for the weeks ahead.
We don’t expect it all to be rosy. It could get choppy in the near-term as stocks are long overdue for some kind of correction. After all, the S&P 500 is up 17.5% since the first week of November. This doesn’t mean a correction is imminent, but we must be prepared.
Some of the ways we help protect and prepare include:
As Ecclesiastes 11:1 states, “Give portions to seven, yes to eight, for you do not know what disaster may come upon the land,” we believe this type of diversification and portfolio construction helps position portfolios for both good and hard times.
We are prepared for virtually any type of market conditions. When the next pullback unfolds, we expect the dip to be a great time to add to your portfolio. Our team is here for you no matter what comes our way; we are in a good position for what comes next!
Sources: Yahoo Finance, Reuters.com, and JP Morgan Market Insights
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