The 1-Minute Market Report – December 12, 2020

A quick summary

• A Covid vaccine is here, so why isn't the market taking off?
• The bulls are still in charge but upward momentum is slowing.
• The earnings recession continues but 2021 estimates look rosy. 
• The bond market is under selling pressure.
• Value and Energy stocks are mounting a comeback.

The S&P 500 was up 1.0% last week.

It was a bad week, down 4 out of 5 days. Probably dampened by the weak employment report last Friday. Here's a chart that tracks the S&P 500 over the past 12 months.

This is the most over-stretched market in history.

If you believe, as I do, that mean reversion (regression to trend) is a natural law of the market - as gravity is to physics - this chart should concern you. (It comes from Jill Mislinski.)

The S&P 500 is now trading 136% above its long-term trend. That's higher than it was at the height of the 2000 Tech Bubble, and higher than the 1929 peak when cabbies and shoe-shine boys were giving stock tips to their customers.

The Sector Returns

Sorted by YTD returns, this table gives a snapshot of where the money is being invested. Consumer Discretionary and Technology are the dominant sectors.. Energy, which is last, is starting to outperform.

Earnings & Earnings Estimates

The chart below shows the S&P 500 (blue line, left scale) superimposed on the quarterly per-share earnings of the S&P 500 (gold bars, right scale). The last five bars are earnings estimates going forward. 

The market is forward-looking and it seems to be counting on those rosy earnings estimates to hold. I'm not so sure. Wall Street analysts are usually too optimistic with their estimates and downward revisions are common as we get closer to the current earnings season.

What I see in this chart is the potential for market corrections as analysts begin to rein in expectations.

Final Thoughts

I think it's likely that Tech will continue to lead the market higher, but the gap in performance will continue to shrink as investors look for value in an overvalued market. The bullish case for the market is based on a few things happening: 

• Continued Fed liquidity injections, which are likely.
• Continued reopening of businesses, which will depend on the Covid curve.
• Continued gains in employment, which will also depend on the Covid curve.
• Continued improvement in GDP growth, which depends on all of the above.
• A trough in earnings by Q4 2020 and a return to record earnings by Q4 2021.

There are risks for each of these assumptions and that's why I think we are likely to have corrections along the road in 2021.