by Blaine Dickason
Senior Vice President, Trading and Fixed Income Portfolio Management

Today’s Bureau of Labor Statistics jobs report spotlighted the difference between Wall Street and Main Street. The net loss of 140,000 jobs in December, driven by the loss of 372,000 restaurants and bar workers, was balanced by the increasing employment in other sectors of the economy, notably the manufacturing sector (see chart below). These sectors continue to heal from the wrenching effects of the pandemic that took hold in last year’s first quarter. The Federal Reserve and other major central banks remain firmly committed to supporting the global economy and have their collective feet set firmly on the gas pedal as they provide accommodative financial conditions in the form of low interest rates and large-scale asset purchases. Vaccines will be widely available this year and will contribute significantly to the re-opening of the global economy.

Through a stimulus lens, this week’s special runoff election in Georgia has delivered something of a “Goldilocks moment” for stock market investors. Markets quickly assumed the new Democratic control in the Senate would lead to another round of significant fiscal stimulus and this morning’s weak labor report only solidifies this consensus. However, with an evenly split Senate needing Vice President-Elect Kamala Harris to cast any tie-breaking vote, the odds of sweeping changes to tax policy remain muted as moderate members of both parties will have greater influence and temper any sudden lurches to a new agenda which may have a meaningful impact on the U.S. economy.

The heightened prospect for additional fiscal stimulus from Congress has already led to some notable sector outperformance in the stock market this week. Higher growth and inflation expectations have helped lift the yield on the 10-year U.S. Treasury to over 1 percent. More importantly, the differential between this yield and the near-zero overnight policy rates set by the Federal Reserve has achieved levels not seen since 2017. This metric is a significant driver of bank profitability and the Financial sector responded as one of the best performers of the week. The very cyclical Energy and Materials sectors have also outperformed in a nod to expectations for an acceleration in transportation and manufacturing activity this year.

One of the Federal Reserve’s twin mandates is to promote stable prices, which they have defined as inflation at the rate of 2 percent as measured by the annual change in the price index for Personal Consumption Expenditures (PCE). The most recent reading for this measure was 1.4 percent which was released right before Christmas. Some market-based and forward-looking expectations for inflation have begun to anticipate a liftoff in inflation. However, based on the most recent Federal Reserve minutes released on Wednesday, they will continue their current stimulative pace of bond buying until “substantial further progress has been made towards reaching the Committee’s maximum employment and price stability goals.”

Week in Review and Our Takeaways

West Texas Intermediate Oil climbed above $50 per barrel this week for the first time since the onset of the pandemic as investors expect increased demand related to a reopening economy later this year
This week, the S&P 500 Index climbed 1.8 percent

Disclosures