Markets Close Mixed on Final Full Trading Day Ahead of Christmas

U.S. equity markets ended the day mixed as the Dow Industrials put on a little holiday rally, but the S&P 500 gave up gains in the final few minutes of trading. The Nasdaq ended the day slightly lower in a reversal of the trend we have seen all week. Financial stocks and small caps are this week's winners, as investors are betting on higher real interest rates in the future and a broader economic recovery.

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The recovery is not happening in the labor market as we learned today that 803,000 Americans filed for first-time unemployment claims in the week ending Dec. 19. While that was lower than expected, it's still the third week in a row of weekly jobless claims topping 800,000. Furthermore, personal consumption expenditures in November fell for the first time in seven months, and the U.S. housing market is showing signs of slowing. 

President Trump did not sign the $900 billion stimulus bill passed by Congress, calling it inadequate and pushing for $2,000 stimulus checks to be sent to qualifying Americans instead of the proposed $600. Although he can't veto the bill, which was passed by both houses, he can delay it. He did exercise his veto powers to strike down the $740 billion defense bill in a surprise move to everyone on Capitol Hill. 

Equity investors have largely ignored the economic and political headwinds that have been blowing in our faces for the past nine months. While markets have been stuck in neutral for the past few weeks, investors may still be waiting for the Santa Claus rally, which officially begins tomorrow and lasts until the second trading session of the new year. But as LPL Financial points out, going back to 2000, it is pretty clear that if these usually bullish seven days are higher, it bodes well for January and the full year. If Santa fails to visit, trouble could be coming down the chimney.

Consumer Spending Shrinks

Americans are spending less money these days. U.S. households cut spending in November for the first time in seven months, signaling the economic effects of COVID-19 are not over yet. Personal consumption expenditures (PCE) decreased by $63.3 billion, or 0.4%, last month, according to the Bureau of Economic Analysis.  

Specifically, Americans are spending less on clothing, footwear, and new motor vehicles — though they have purchased more food and beverages from supermarkets and liquor stores, offsetting the decline. Consumers also cut spending at restaurants and bars, and on accommodation and household utilities like electricity and gas. 

The decrease in spending correlates with the $221.8 billion, or 1.1%, decrease in personal income last month. This was primarily due to the declines in Paycheck Protection Program loans to businesses, though it was offset by an increase in wages and salaries in service-producing industries. With a new $900 billion stimulus package potentially on the way, perhaps personal income and, in turn, PCE will improve in the new year.

Skipping Over the IPO

The Securities and Exchange Commission (SEC) will now allow companies to raise capital through direct listings, opening the door to a new alternative to the traditional initial public offering. The SEC approved the new kind of direct listing in an order posted on its website Tuesday, saying it will help startups save on underwriting fees and hold onto more of the gains in their share price when they go public.

The decision was a victory for the New York Stock Exchange, which has been trying to change its own rules to make the direct listing process easier for companies that want to take this path to the public markets.

Who Wins?

• Companies that want to go public but don't want to spend the money on expensive roadshows or give up equity to underwriters like investment banks.
• Stock exchanges like the NYSE and Nasdaq that want more companies to list with them. Believe it or not, the number of publicly traded and listed companies is down nearly 50% in the past 20 years.
• Company insiders who don't want their equity diluted by underwriters, or to be told how and when to price their shares when they list.

Who Loses?

• Investment banks that make billions of dollars in underwriting fees to take companies public.
• The Council of Institutional Investors — the big lobby group for those investment banks. They hate this rule because it takes their cake away from the lucrative underwriting dessert table.

Some of the most popular public companies of the past few years have taken the direct listing route, and it has served them well. Expect to see more of these in the new year.

Overbought, No More

There is a widespread belief that asset prices always revert to the mean — eventually. History generally proves that to be right — although 2020 has thrown us a few exceptions. But the axiom is proving itself correct yet again as the percentage of stocks in the S&P 500 that were considered "overbought" has been more than cut in half since peaking in mid-November. 

According to Bespoke Investments, the S&P 500 reached its most overbought peak on Nov. 16, with 73% of the stocks in the index hitting those levels. Since then, that number has been cut to 32.4%. While still overbought, the excessiveness has waned as prices have consolidated. 

So Why Does the Market Keep Rising?

Strong market breadth, naturally. Rallies across sub-sectors of the S&P 500 and among individual stocks that we don't talk about much, have been boosting the index higher. It's not the FAANG or FAAMG stocks as it was earlier in the year — which is a good sign since too much concentration in a handful of stocks can be dangerous when the bottom falls out.

Christmas Winners

No fewer than 277 stocks listed on U.S. exchanges (not including penny stocks) hit new all-time highs today. That market breadth I was talking about earlier is in full effect. Small cap stocks also hit new high-water marks as the Russell 2000 made yet another all-time high. 

Of the larger cap stocks, these three climbers show the diversity of the rally, which is well-balanced and robust:

• Chipotle (CMG): It's been a year of one all-time high after the other for Chipotle, which figured out its curbside and online order issues last summer and has been one of the top performing food and beverage stocks all year.
• Ingersoll Rand (IR): The power tool and heavy equipment maker has been betting on the industrial and manufacturing recovery and has been on a steady upward climb since the spring.
• Sonos (SONO): It's in every room — or you wish it was. The home audio system found its moment and its market in 2020 as we turn our dens into media centers. Its shares are up nearly 60% year-to-date.