The S&P 500 closed this past Friday at 3,824, which pushes the resistance level to 3,880 and the support level to 3,730. With the inauguration coming up, we might see some volatility in the markets. Another thing we are keeping an eye on is the 10-year treasury yield. Last week, this went over 1% for the first time since March 19, 2020. As of Friday’s market close, it was at 1.13%. This could potentially be one of those shifts that we talked about last week when we mentioned the individual sectors within the S&P 500. This could be evidence of a potential shift within the Financial sector of the S&P 500.
Last week, we talked about how the market historically outperforms with a divided Congress and underperforms when the Democrats control Congress. Now that we know the results and that the Democrats will control Congress, we wanted to point out that it doesn’t necessarily mean the market will be negative. Going back to 1951 when Harry S. Truman was in office and the Democrats controlled Congress, the market has been higher 83% of the time when Democrats controlled the White House and Congress with an average annual return of 13.2%. It’s important to note that other things were going on in the world during those times and we are only talking about market performance. While taxes and regulation may go up, so will government spending which is why GDP is historically higher when Democrats control the White House and Congress. As always, no guarantees, but the historical performance of the market would suggest that a Democratic sweep should cause investors no concern strictly based on the makeup of the White House and Congress.
It has been a cloudy year for corporate earnings. Not only with earnings being lower but with guidance as the virus has provided a lot of uncertainty for the future. These fourth-quarter earnings season numbers are very important for us because it feels like we may be getting back to some normalcy where we will be looking not only at what companies are reporting in earnings for the fourth quarter but what they are projecting for 2021. The market prices on future expected results. So, why is the market continuing to go higher when earnings have fallen? We are seeing the price-to-earnings ratio rise to historic levels. In order to get that back to normal, earnings have to go up. We are expecting earnings to show a drop in the fourth quarter by 9.8% but we are expecting revenues to come in at only down 1.3%. The business activity is out there, there’s just not as many earnings because costs are higher. Looking back isn’t the most important, it’s looking forward at what these companies are projecting out for 2021. Projections are currently looking very positive. If we have these positive projections of the market, while they look expensive based on right now, it may not be expensive-looking out if you take into account all of the stimulus that will be put into the economy. It will be good for us to get back to normal on how we analyze the market.
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