Manufacturing Momentum Builds to Open 2021

The inauguration of President Joe Biden went off without a hitch last week, and markets calmly carried onward through the week as well. With the politics of power transfer in the rear view, markets can shift to the road ahead. Right now, that’s corporate earnings season, and a slew of mega- and regional banks have already reported. While low interest rates remain a headwind, earnings have largely stabilized from disruptions last spring. Bank earnings largely beat analyst expectations, and the banks are beginning to release reserves that were set aside for loan losses, buying back stock and potentially raising dividends. Earnings reports will continue ramping this week, and we’ll share any key themes our analysts uncover from the numbers.

Markets will also closely monitor how the Biden administration tackles the logistical challenge of achieving 100 million doses of the vaccine in 100 days. The pace of vaccinations will be a key variable this year, as markets use it as a guidepost to forecast a return to normal in summer. Meantime, data are showing a nice acceleration in economic activity, supporting our call for continued broadening of economic growth through the year.

WALL STREET WRAP

Housing Still Hot: Another round of housing data, and another affirmation of what we’ve known for some time: The housing market has muscle. Housing starts and building permits both accelerated in December, fueled by potent tailwinds of low mortgage rates, a demographic wave of millennial homebuyers and a preference for suburban over urban living. Another potential tailwind: President Joe Biden is set to propose a $15,000 first-time homebuyer tax credit that could be accessed immediately to help with a down payment.

Housing starts jumped 5.8 percent to a seasonally adjusted annual rate of 1.669 million units. Permits for future construction rose 4.5 percent to a rate of 1.709 million units in December — permits typically lead housing starts by about two months. Builder confidence, on the other hand, dipped slightly in January as high demand for housing is lifting the price of lumber and land. The NAHB/Wells Fargo Housing Market Index fell three points to a still historically high 83 — anything above 50 is considered positive.

“While housing continues to help lead the economy forward, limited inventory is constraining more robust growth,” said NAHB chief economist Robert Dietz.

Economic Broadening Theme Intact: The IHS Markit flash composite index for manufacturers and service providers rose to 58 in January from 55.3 in December, reaching the second-highest mark since March 2015. The manufacturing component advanced to 59.1, which is the highest reading going back to May 2007. Across the board, gauges of production, orders, export demand and employment all strengthened. In fact, supply shortages, due to pandemic-related disruptions, are driving up input costs that producers have been able to pass on to customers.

Our theme for 2021 is a continued broadening of economic growth, and the flash data from January clearly support our call. The data tell us inventories need replenishing and demand is strong, and that could lead to increased employment and improved earnings for a wider range of companies beyond 2020’s favored “stay-at-home” tech names.

Further Evidence: The Philly Fed manufacturing survey (covering the region near Philadelphia) also showed strength in manufacturing, as current indicators all pointed higher in January. The key takeaways from the survey: Most firms, 64 percent, reported increasing demand, and 69 percent have plans to increase production in the first quarter. More than half said they would hire additional workers to meet production goals — again, further evidence of broadening growth.

China Hitting the Gas Pedal: China’s GDP expanded 6.5 percent (YOY) in the fourth quarter, beating forecasts and earning a place among the few countries to register growth in 2020 — the Chinese economy expanded 2.3 percent for the full year. Still, it was one of the weakest years of growth in more than 40 years, due to the contraction early in 2020. The GDP figures were released after China reported its highest-ever trade surplus in December, following three months of double-digit exports growth. In all, it points to an economy firing on all cylinders.

When we talk about economic growth broadening, we include the U.S. and global economies. That should result in a more inclusive U.S. stock market (growth for cyclicals and smaller companies, for example), but also emerging markets and international stocks, where valuations look constructive on a relative basis.

THE WEEK AHEAD

As mentioned at the top, a flurry of corporate earnings will roll out this week, and we’ll provide key takeaways as we study the results. But there are a few other key events for the week.

Consumer Confidence: On Tuesday the Conference Board’s consumer confidence read for January will hit newswires. We’ll get a rough look at how the pandemic, new administration and vaccines are impacting consumer outlook.

The Fed: The Federal Reserve will meet this week, and Fed Chairman Jerome Powell will hold a news conference on the state of the economy and the central bank’s outlook on Wednesday.

Q4 GDP: We’ll see how much the U.S. economy grew in the final quarter of 2020, and the latest estimate from the Atlanta Fed’s GDPNow tracker is for 7.5 percent.

Home Sales, Prices: Home sales and average home prices could be worth a closer look this week. While housing has remained very strong, is it too strong? High demand is allowing sellers to raise prices, which could slow sales a bit as buyers opt to remain on the sidelines. We’ll get some insight into the interplay between prices and sales this week.

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