Strong Start: Government Shutdown Averted But Slow News Week Ahead

(Monday Market Open) If it weren’t for two words on a piece of paper, this would probably be a chaotic day on Wall Street. However, President Trump put his signature on the stimulus and government funding bill last night, arguably calming the waters a bit.

With Trump’s autograph, the government will stay open and most Americans will receive $600 checks. It’s a much smaller stimulus than the one last spring, so it’s unclear how much impact it might have on the economy. Stocks jumped on the news, but didn’t go too crazy, maybe because so much of this has been built in for weeks. 

The Washington drama isn’t necessarily over. There’s still a vote this week where Congress will attempt to override Trump’s veto of a defense bill that passed with wide bipartisan support. Defense-related stocks like Lockheed Martin LMT and Northrop Grumman NOC have been under a bit of pressure the last couple of months, but there’s more behind that than just this disputed bill. That said, an override of the veto might help the sector. The House vote is scheduled for today and the Senate vote is tomorrow. 

Sifting a Thin Data Week

Aside from Washington, this could be one of those dull end-of-the-year weeks with thin volume and little news. There is some data coming down the pike (see more below,) including pending home sales for November on Wednesday. We’ll preview the numbers tomorrow. 

Also, keep in mind it’s a short week (markets are closed Friday) and even with the potential Washington fireworks, volume on Wall Street could be light. That often means bigger swings one way or the other, so anyone going into or out of stocks in the coming four days might want to take extra caution. The Cboe Volatility Index (VIX) softened ahead of Christmas, but still hasn’t taken out 20 on the downside since last February. Worries about the chance of another jump in covid cases after the holidays could have some investors on edge over the next few days and weeks. 

Another thing you might want to track this week is updates on holiday shopping. Going into the holiday season, the National Retail Federation predicted retail sales would rise between 3.6% and 5.2% from a year ago. Unfortunately, early word is they didn’t. Instead, sales rose 3% between Oct. 11 and Dec. 24, according to Mastercard MA SpendingPulse. The good news, so to speak, is that even though people were stuck at home in many cases, that didn’t stop them from buying gifts and other items. Online sales rose 49% from a year earlier. 

Notice the early start of that date range. The survey took into consideration that shopping season began earlier than usual due to retailers starting their sales in October amid the pandemic. While 3% retail spending growth isn’t as good as the 5% some economists had predicted, it’s still growth—something many hadn’t expected with the economy so weak. 

We’ll get more color on holiday shopping trends in January when we start hearing from retailers reporting quarterly earnings. Apple AAPL and Amazon AMZN are definitely ones to look out for before the big box retailers begin reporting in February. Also prepare for the monthly December retail sales report, expected Jan. 15. 

Brexit Uncertainty Departs, Returns

Turning across the Atlantic, last Thursday’s resolution of Brexit ends more than four years of bickering over how the U.K. would trade with Europe now that it’s left the European Union. While Brexit often got overshadowed by Covid and trade with China the last two years, it was arguably one of the biggest geopolitical questions dogging the market, and caused its share of volatility and tough days on Wall Street.

Now, to paraphrase a long ago U.S. politician, no one in the markets will have Brexit to kick around anymore. Meaning that with uncertainty over the negotiations out of the way,  people can’t blame fears of a “no-deal” Brexit for market weakness. Instead, many could be waiting to see how the deal works in practice over the coming weeks and months, which brings uncertainty of its own. The initial market reaction is playing out right now, and one way to monitor it is to keep an eye on the dollar/pound relationship and bonds. The British pound initially rallied then fell slightly after the news.

European bonds rose on the deal news, a potential sign of investors getting defensive. Strength in European bonds can often spill into the U.S. bond market, threatening to keep a ceiling on yields. We’ll have to watch and wait, because a day or two isn’t a trend. If Brexit ultimately strengthens the pound and softens the dollar, it could also lead to higher crude prices, an analyst told Barron’s.

For something potentially positive out of Brexit, consider that with no deal, it would have been tough for President-elect Biden to negotiate terms of a U.S.-U.K. trade relationship once he takes office, Barron’s reported. The deal conceivably puts U.S.-U.K. trade in a more positive light moving forward.

As we noted last week, it’s very hard to say that Brexit is fully built into markets. The reason being is that it’s never been done before. Nobody’s left the European Union before. Short term this is great news because it removes a bit more uncertainty. But long term we don’t know all the ramifications of Brexit. It’s likely to be back in the headlines in Q1.

CHART OF THE DAY: TECH SHINES IN ’20. Arguably, few have gone broke investing in Technology over the last few years, and 2020 was no exception. As this year-to-date chart shows, the Nasdaq (COMP—blue line) is up more than 40% going into the final week of 2020, while the Russell 2000 (RUT—candlestick) small-cap index recently moved ahead of the S&P 500 Index (SPX—purple line). Later this week, we’ll break down how specific parts of Tech—including FAANGs and semiconductors—did in comparison to Tech overall. Data Sources: FTSE Russell, S&P Dow Jones Indices, Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.