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| January 26, 2021

Anticipation of a new fiscal stimulus and improved vaccine distribution powered stocks to fresh record highs last week with technology stocks leading the way.
The Dow Jones Industrial Average gained 0.59%, while the Standard & Poor’s 500 picked up 1.94%. The Nasdaq Composite index led, gaining 4.19% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, rose by 1.15%.

In a holiday-shortened week, stocks rallied as investors welcomed testimony from incoming Treasury Secretary Janet Yellen to the Senate Finance Committee that suggested lawmakers needed to “act big” on fiscal stimulus, raising hopes for a new round of federal spending.

An orderly presidential transition and the anticipation of a more effective vaccine distribution plan contributed to stocks touching multiple new highs last week. Investor enthusiasm was further supported by a strong start to the fourth-quarter earnings season.

Mega-cap technology companies resumed their market leadership ahead of a full calendar of big tech earnings reports this week. Market momentum stalled a bit into the close on concerns that any stimulus spending bill might come in lower than expected.  
One of the concerns of market watchers has been the valuations of stocks. Stocks are currently trading at about 23 times 2021 earnings, above the historical range of 15 to 17 times forward earnings.  

Today’s valuations may be explained by expectations of a strong economic rebound and a concomitant rise in corporate profits. So far, this earnings season appears to vindicate the optimism; With 41 of S&P 500 companies reporting through last Thursday, 91% of them have exceeded estimates by an average of 18.5%.

Investors are expected to continue to watch company earnings in the weeks ahead to see whether these consensus-beating results continue.
: Consumer Confidence.
Wednesday: Durable Goods Orders. FOMC (Federal Open Market Committee) Announcement. 
Thursday: Gross Domestic Product (GDP). Jobless Claims. New Home Sales.
: KimberlyClark (KMB). 
Tuesday: Microsoft (MSFT), General Electric (GE), Advanced Micro Devices (AMD), Verizon (VZ), Johnson & Johnson (JNJ), Lockheed Martin (LMT), Starbucks (SBUX), 3M Company (MMM), Texas Instruments (TXN), Novartis (NVS), D.R. Horton (DHI).
Wednesday: Apple (AAPL), Facebook (FB), AT&T (T), Boeing (BA), Abbott Laboratories (ABT), ServiceNow, Inc. (NOW), General Dynamics (GD), Norfolk Southern (NSC). 
Thursday: McDonalds (MCD), Comcast Corp. (CMCSA), Southwest Airlines (LUV).
Friday: Caterpillar (CAT), Chevron (CVX), Eli Lilly (LLY), Honeywell International (HON), Charter Communications (CHTR).
It is amazing to think about the rollercoaster in stocks last year.  At one point the S&P 500 was down well over 30%.  Then, the government and the Fed stepped in and began throwing money out of helicopters and the market decided it liked it and ended up decidedly positive for the year.  This is indicative of how much the market loves liquidity and an easy money policy from the Fed.

The chart below shows from 2018 until now how when the Fed's balance sheet was increasing the market tended to increase.

By all accounts, this market is expensive.  Does expensive mean it is going to go down dramatically tomorrow?  At least in the near term, I doubt it.  As you can see from the charts below, most of the various valuation metrics indicate the market is somewhat expensive.  However, as evidenced above when the Fed has their foot on the gas, asset prices including stocks, tend to increase.  

The million dollar question is when will the music stop?  For now, it appears the Fed will continue to keep interest rates low and may possibly print more money, depending upon Biden's new stimulus package, thus increasing their balance sheet even more.  So what does one do?  Do they lever up like the Fed, back up the truck and buy stocks with both fists?  Do they bail out because things seem expensive?  I can give you the perfect answer at the end of 2021.  In the meantime, the prudent and practical answer is to maintain your discipline.  Maintain the asset mix you are most comfortable with knowing the market is expensive, but the government is pulling every lever they can to keep it that way, for now.  

I've found many folks have two levels of risk tolerance... one when things are going their way and one when things are against them.  Both tend to be driven by the emotions fear and greed.  There is a balance somewhere in the middle and this isn't meant to be a dissertation on the philosophy of behavioral finance, so I'll move on.

Over the coming weeks the new administration will lay out their plans for stimulus, COVID vaccines and many other things.  These will all have some affect on what stocks do going forward.  However, the most important lever that will move stock prices is the consumer.  Is the consumer healthy and are they out spending or are they in a bunker hiding from COVID?  I suspect most are tired of their bunker and would like to get back out into the world and participate.  In that case, while the market is growing more expensive, the trend is your friend.  For now, the path of least resistance is up, but pay attention (don't worry, we are).  Should something alter the current status quo of market fundamentals, the price of poker will change and stock valuations may matter once again.

Stay tuned...