North American markets today, Monday, viewed several hours before opening are mixed and changeable, with the NASDAQ shifting back and forth between green and red at time of writing while the S&P 500 and DOW and even the safe havens of gold and silver and most major currencies are firmly in the red.
It is very much within the realm of possibility that these indicators will change before and after the actual market opening at 9:30 a.m. EST. depending on reaction to the news of a compromise on the COVID 19 stimulus plan in Washington along with President-elect Joe Biden’s confidence-boosting intention to receive the COVID 19 vaccination in public today. Of these indicators, the S&P 500 shows the most promise of shifting and its not a strong promise.
That connection suggests one of many questions that we have to face in the markets next year: to what extent does the stability of the markets depend on the next government stimulus announcement and to what extent the Biden administration can --- or is willing to – continuing providing stimulus?
European markets are open at time of writing and indicators there are deeply in the red as markets react to the United Kingdom’s renewed lockdown. British Prime Minister Boris Johnson has cancelled the planned easing of restrictions in the face of a mutated version of the COVID 19 virus and in effect, the country is further shutting down.
That has brought decisions by the Canadian, American, German, French and Italian governments to shield themselves from the British calamity with travel bans and Israel is studying it. The questions here are enormous: what will be effect on the British economy since it depends on Europe for a whopping 50% of its exports? And are other countries going to have to confront the variant? How much of a hit will British travel and entertainment sector stocks take (likely to be considerable) and how much good news does this mean for sectors such as food delivery (likely to be at least positive)? Add to that the confusion over yet another missed BREXIT deadline and the picture for British stocks isn’t very pretty today.
Several other market events this week intimate possible questions for 2021. Amongst hotly watched developments today, TESLA Inc. enters the S&P 500 following its record high on Friday. The shares have surged since the announcement of its acceptance into the S&P 500 was announced in November. This will create a ripple effect of sorts, according to a Reuters analysis. TESLA’s addition to the S&P 500 will force index and Index-tracking funds to buy about $85 billion worth of the shares so that their portfolios reflect the index.
Reuters explains that those funds simultaneously must sell other S&P 500 constituents’ shares worth the same amount. Had the stock been included in the S&P 500 all year, it would have increased implied volatility on the benchmark index by only a small amount, according to a study by UBS strategist Stuart Kaiser, in the same Reuters analysis. For actively managed funds which have avoided TESLA previously (and with good reason) the question will be whether to take or increase stakes in TESLA.
A less savory though no less important question comes with the near-cataclysmic implications of the SolarWinds hack, blamed on Russia and responsible for breaches at federal agencies, including the Departments of Homeland Security, Treasury and Commerce and others. The hack also hit Microsoft and other blue-chip companies.
The hackers used the SolarWinds platform to get into these networks. The big picture question, of course, is how the hackers managed such a wide-sweeping hit, and whether they can – or plan to – hit again.
For investors, the question is how to play the emergency. The hack highlights a huge market, suggests Dan Ives, Managing Director of Equity Research at Wedbush Securities in New York. “We believe there is a $200 billion dollar growth opportunity in cloud security ‘up for grabs’ over the next five year,” he says.
Vendors that have the solutions to protect critical cloud deployments and seamlessly work with proprietary and public/hybrid workloads and profit from his urgent need. To what extent will security vendors who can protect cloud deployments do well in 2021? The answer is ‘likely quite well’.
This is essentially another effect of the pandemic which forced companies to shift employees to working at home, meaning that critical functions are off-site. While the real recovery – whenever it truly occurs -- will mean that some employees will return to company offices, it is doubtful that all employees will return to all offices. The work-from home strategy meant many changes including moves by employees to the suburbs. Confidential company documents will continue being exposed over numerous systems.
Ives says that cyber security names such as Zscaler, Crowdstrike, CyberArk, Qualys, Varonis, SailPoint, Telos and Tenable as well-positioined to take advantage of this development.
Another trend to watch for – along with the companies riding it in 2021 is the battle for the living room with the Walt Disney Company’s Disney +and NetFlix as the two major contenders. Despite losses in its theme parks and cruise businesses, Disney stepped up its streaming campaign which in turn drove its shares up in spite of those losses. The two majors are fighting the battle indifferent ways. Disney, sometimes affectionately referred to as ‘Uncle Walt’ by Hollywood insiders has an iconic name and 100 years of films in its vaults, some of them sentimental favorites. It’s also creating new favorites such as the next chapter in the Star Wars saga. Netflix has a hard driving aggressiveness, and its executive are generally more accessible to news media.
The Street treats the two companies differently. Out of 24 analysts rating Disney, only one – Imperial Capital -- has it as a ‘Sell’ while five including UBS have it as a ‘Hold’ and all others have it as a ‘Buy’. The Street is less positive about Netflix. Out of 37 analysts, five -- including Wedbush Securities and Société General have it as a ‘Sell’ while nine have it as a Hold’ and the remainder have it as a ‘Buy’’
And still another question to watch for is the fallout from the blacklisting of Chinese companies by the United States Commerce Department which on Friday imposed controls on 60 Chinese companies including Semiconductor Manufacturing International Corp. often referred to as SMIC and SMICY. The aggressive chipmaker fell $0.59 to end the day Friday at $12.75 and is rated as a ‘Sell’ by Citigroup, and, surprisingly as a ‘Buy’ by Goldman Sachs. Whether Goldman Sachs revises the rating and whether the problem erodes faith in Chinese companies that are not blacklisted remains to be seen.
And on a personal note: my thanks to the readers who took the trouble to send their reactions to the projections of a deadline-crazed journalist. The comments were deeply appreciated and best wishes to all for market success in 2021!
Disclosure: I do not own any shares in any companies mentioned in this column.