A harsh reality for the euphoric stock market? The next week could be the closest thing to a reckoning for optimistic investors so far in 2021.
It’s the busiest week of the fourth quarter’s earnings season, highlighting the long-awaited results of big companies like AT&T T,
Apple Inc. AAPL,
Facebook FB,
and Tesla TSLA,
In all, about 118 companies are scheduled to report quarterly results in the last week of trading in January, including 13 components of the DJIA Dow Jones Industrial Average,
John Butters, senior analyst at FactSet, told MarketWatch.
And more than 60% of that weekly attack will take place between January 27 and 28.
The frenetic period could be crucial for a market that may be looking for its next spark as President Joe Biden’s new government develops its political initiatives and plans to tackle the COVID-19 pandemic.
So far, optimism is high among stock investors, with sentiment data from Ned Davis Research reading 74.4%, a level that has reached just 7.4% of the time since 1994.
Likewise, the bull-bear spread is at 19.3% against a median of 4% on December 31, according to the survey by the American Association of Individual Investors.
Source: American Association of Individual Investors, Principal Global Investors
Ned Davis Research says the buying climate has apparently crushed the appetite for bearish bets that stock prices will face a significant correction in the short term. “One thing investors have done less of is short selling,” analysts Ed Clissold and Thanh Nguyen wrote in a January 19 research report.
According to NDR data, the short selling index, the number of short selling shares divided by the total number of issues traded, reached its lowest level since 2011, in November.
You don’t have to look far to find evidence of the treacherous path that short sellers are currently facing.
Case in point, GameStop GME stock,
is on track for its best monthly increase in its history, 245%, while retail investment fanatics praised the stock and urged users on financial-oriented social platforms like Reddit to buy the stock to squeeze the famous and activist investor short seller Andrew Left’s Citron Search.
The actions of fanatical investor groups went beyond cursing and hacking attempts and included what Left described as “serious crimes such as harassment of young children”, Wrote MarketWatch’s sister publication Barron’s.
For some, it is the boiling of the market at its peak. Short sellers and sibling retail investors trying to demonstrate their newfound power.
Is this how the precursor of a bubble feels? Are we in one? When will it appear, if so?
The Federal Police
These are all questions that can be asked of the Federal Reserve when it provides the backdrop for next week’s other big event: the latest monetary policy update.
Fed Chairman Jerome Powell has often been accused of helping to prevent a calamity in the financial markets during the onset of the coronavirus pandemic in March last year, as well as promoting too much risk taking.
The Federal Open Market Committee, which Powell heads, quickly cut interest rates to almost 0% and injected trillions of dollars of liquidity into the financial market that had been shaken by COVID-19.
But the Fed’s policies have spurred part of the risk exposure, some critics argue. The bears also argue that the endless printing of money will have long-term consequences for the US dollar, the economy and, eventually, financial markets.
Biden is proposing an additional $ 1.9 trillion in federal government spending to help free the U.S. economy from recession, as coronavirus cases and deaths reach a new peak this month.
All of which may add additional meaning to next week’s Fed meeting.
“All eyes will be on President Powell at next week’s FOMC meeting. We expect him to adopt a more optimistic but cautious tone, ”wrote Oxford Economics economists Lydia Boussour and Gregory Daco, in a research note on Friday.
In recent speeches, Powell has already indicated that the Fed is not looking forward to backing down monetary policy accommodation any time soon, including raising interest rates on historic lows or reducing asset purchases, a source of support for financial markets.
The Fed meeting begins on Tuesday, with Powell & Company delivering its policy update on Wednesday at 2 pm ET, followed by a news conference organized by the president.
US economic growth?
On Thursday, the day after the Fed’s decision, market participants will await the official bulletin on the health of the American economy.
According to consensus estimates among North American economists consulted by MarketWatch, the US economy may have grown by about 4% on an annualized basis in the last three months of 2020, which would normally be phenomenal, but comes in the wake of an increase of 33.4% in the third quarter.
Still, if the GDP reading continues to show upward progress, it could highlight that the economy is moving in the right direction, even with the coronavirus pandemic.
After all that has been said and done, if the Dow, the S&P 500 SPX index,
and Nasdaq Composite COMP,
are still at a distance from record highs, bulls can feel even more encouraged.