First the Fed and Now Congress: Economic Stimulus is Drying Up and Some Investors Appear Concerned

The S&P 500 Index futures (/ES) traded about 2% lower in premarket trading on Monday on rising Omicron COVID-19 cases but trimmed some of those losses to about 1.11%. Many stores and restaurants In New York and New Jersey are shutting down. Other countries are imposing stronger restrictions like the Netherlands which reimposed a lockdown of all nonessential shops, bars, and restaurants closed until mid-January.

COVID-19 vaccine maker Moderna MRNA announced that its third vaccine dose was effective against the Omicron variant. The stock was trading 7.28% higher in premarket trading.

Oil futures (/CL) also fell 4.69% down below $70 on Omicron fears. Winter already tends to see lower demand for crude because fewer people in the Northern Hemisphere travel during winter months despite the holiday season. Omicron could cut demand even further if holiday travel plans are canceled.

Falling oil prices have pulled Chevron CVX 1.77% lower in premarket trading. The stock is one of the stocks that was weighing down the Dow Jones Industrial Average futures (/YM) 1.23% before the open.

The Build Back Better bill received another blow over the weekend that could have investors concerned about a lack of stimulus spending. Senator Joe Manchin (D., WV) told reporters that he wouldn’t support the bill because of concerns that it would add to the already growing inflation problem in the United States. According to the Wall Street Journal, the loss of Mr. Manchin’s vote will likely doom the $2 trillion dollar bill. With the Fed tapering its stimulus plans and the inability to get the spending bill passed, investors appeared to be concerned about the economy.

The news around Omicron and the failure of the Build Back Better bill appear to have increased the degree of uncertainty that investors are feeling. The Cboe Market Volatility Index or VIX) jumped more than 20% before the open and traded around the 26 levels. However, the 10-year Treasury yield (TNX) is only slightly lower and appears to be holding at a long-term support level. This may suggest that bond investors aren’t as nervous as stock investors about the weekend’s developments.

After Monday’s close, there are two more stragglers of interest announcing earnings: Nike NKE and Micron MU. News from Nike has been helpful in measuring supply chain issues and Micron produces a semiconductor that could help provide more insights into the chip shortages that are holding back many companies from meeting customer demand.

On Friday, investors took some time off from value shopping and focused on bargain shopping. With so many tech stocks having pulled back over the last week, some investors apparently saw some bargains and chose to go shopping. The tech-heavy Nasdaq Composite GIDS was the best performer of the major indices, rising 0.13%. The Dow Jones Industrial Average (DJI) was the worst performer, falling 1.17%. The S&P 500 (SPX) was in the middle at 0.71%.

The Russell 2000 (RUT) rose 1% after bouncing off the bottom of its channel. The small-cap index has oscillated sideways for nearly a full year. If support holds, it could start its return trip to resistance. Small-cap stocks are nearing the time of year when they tend to lead the market. The January Effect is the phenomenon where small-caps tend to outperform larger companies from January to February. Of course, there’s no guarantee this will happen in 2022, but it can be a helpful context when making investment decisions.

Value on Value

Berkshire Hathaway (BRK/A, BRK/B) made it on to Barron’s 10 top stocks for the new year on Friday, but that didn’t stop it from falling 1.74%. However, Berkshire did fall from its new 52-week high set on Thursday. The stock has rallied more than 9.7% from its December low. Apparently, the stock was a target for the recent wave of value investing. It seems right that value investors focused on the company of perhaps the most famous value investor of all time—Warren Buffett.

Rate Check

The bond market has experienced a lot of volatility this month. The 2-year Treasury yield started December at 0.56 and rallied up to 0.70 by December 7. On the Thursday after the Fed meeting, it dropped to 0.64, which was the biggest drop in three weeks. The 2-year yield is often viewed as the one that anticipates Fed rate changes the most, and it has pretty much risen throughout 2021 when it opened the year at 0.11.

It’s difficult to say at this point if the 2-year yield is done with its rally or if its just consolidating. With Fed Chair Jerome Powell loosely targeting 0.90% as the federal funds rate for the end of 2022, it’s likely the long-term trend for the 2-year yield points higher. However, in the short term, it’s possible the yield rests a little while as the market gets through the holidays, deals with the fallout of increased cases of Omicron, and allows a little time for tapering to take effect.

The 10-year Treasury yield (TNX) tested a level of support near the 1.37 level on Friday. In the past, this level has acted as support and resistance. It recently bounced off this level on December 6. With the Fed buying fewer bonds and the Bank of America U.S. Corporate Index Effective Yield at 2.3%, the 10-year yield may see pressure to move higher because investors appear to be demanding higher yields if they’re expected to pick up the slack as the Fed buys fewer bonds.  

If the 2s consolidate and the 10s rise, the yield curve should normalize a bit, and some of the anxiety around the economy may subside. Investors are likely wrapping up their tax-loss selling, short-sellers are likely positioning so they can take time off during the holidays, the Fed announcement is at our backs, and quadruple witching is behind us, so the market may see less volatility as the week matures. And maybe, just maybe, we can finally get that Santa Claus Rally. But it’s still 2021 for a few more weeks, so who knows?

CHART OF THE DAY: SUNBLOCK. The MAC Global Solar Energy Index ($SUNDIX—candlesticks) has often risen and fallen with the overall direction of oil prices (/CL—pink) since 2011. Data Sources: ICE, S&P Dow Jones Indices. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Throwing Shade: Solar stocks are seeing a little shade thrown their way in recent weeks. The MAC Global Solar Energy Index ($SUNDIX) has fallen more than 20% from its November high and nearly 37% from its 2021 high setback in February. There are a couple of reasons why these green stocks are currently in the red. First, solar stocks have had an enormous run, so it’s not surprising that investors are taking profits. From 2017 to its high in 2021, the MAC solar index has risen more than 640%.

Valuation, So Hot Right Now: Second, just like tech stocks, investors are demanding more value from stocks, and many solar companies have high valuations. For example, SolarEdge SEDG and Enphase ENPH have P/E ratios of 115 and 186 respectively. Additionally, companies like SunRun RUN are operating at a loss and therefore don’t even have a P/E ratio.

Additionally, a fundamental driver of the success of solar is rising oil prices. Higher prices push consumers to look for cheaper alternatives. While oil prices have risen through 2021, they have recently pulled back from $85 per barrel to about $70 per barrel. If oil prices were to rally to $110 to $120 as some market analysts have predicted for 2022, then solar stocks may rally too.

Of course, there are other factors that influence a solar stock’s performance, such as management effectiveness and government funding.

Earmarks: Which brings us to our last reason, many of these companies benefit from government green initiatives. Green companies like solar often benefit from tax incentives and government funding to help them grow their business. According to the Los Angeles Times, the California Public Utilities Commission is proposing the reduction of payments to solar customers that contribute to the power grid, adding a grid participation fee, and a few other items that will make going solar less lucrative for consumers.

Additionally, President Joe Biden has failed to get his Build Back Better plan through Congress, which had provisions to help reduce installation costs to consumers by roughly 30% according to the Natural Resources Defense Council. Now that President Biden and Congress appear to have failed to pass their spending bill, solar may continue to struggle.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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