Stocks open higher following the long weekend

• US stocks rise as investors await US Treasury Secretary Janet Yellen’s stimulus pitch to Congress.
• Bond yields are higher.
• European markets are mixed in early trading.
• Asian stocks were mostly higher, with China the lone decliner.

Earnings season off to a very strong start relative to expectations

• Only about 5% of S&P 500 companies have reported results, but 96% have beaten estimates.
• Forward 12 months’ estimates impressively have already increased by 0.5% since January 1, 2021.
• Stability of estimates is key to enabling stocks to grow into lofty valuations.

Investment-grade credit spread nears cycle tight

The extra yield that investors demand for investment-grade (IG) corporates over similarly dated Treasuries was at 1% as of Friday, January 15. This is near the tightest level of the last economic cycle—0.91% in February 2018—indicating strengthening economic confidence but increasingly expensive valuations. We still see an incremental advantage in IG corporates over Treasuries, but continue to emphasize mortgage-backed securities (MBS) for their lower interest-rate sensitivity. For more on credit spreads and our bond outlook, see today’s LPL Research blog.

Events this week include:

• Tuesday: Treasury Secretary nominee Janet Yellen’s Senate confirmation hearing
• Wednesday: Inauguration of President-elect Joe Bidenand Vice President-elect Kamala Harris
• Wednesday: National Association of Home Builders (NAHB) Housing Market Index (Jan.)
• Thursday: Weekly initial unemployment claims report, housing starts, building permits (Dec.), and Bank of Japan and European Central Bank policy decisions
• Friday: Purchasing Managers’ Index (PMI) from Markit (Jan.) and existing home sales (Dec.)
• All week: 40 S&P 500 companies will report fourth quarter 2020 results.

Technical update

US stocks came under pressure Friday as crowded positioning in cyclical sectors may be increasing the risk of a pullback.

• Cyclical minus defensive sector ETF flows have surpassed their 2016 high.
• Market positioning may be tactically crowded in the short-dollar trade.

COVID-19 news

The United States reported 138,000 new COVID-19 cases Monday. New cases were down 35% week over week, while the 7-day average is down 17% from its peak (source: COVID Tracking Project).

• Cases in Western Europe as a whole continue to rise as new case growth in Spain remains uncontained.
• Israel continues to lead the world in the rollout of the vaccine, where more than 25% of the population have been vaccinated.

Research Communications   

New Street View Video Sets Positive Tone

The stock market has started off 2021 surprisingly well, and LPL Research Chief Market Strategist Ryan Detrick says this bull market is alive and well. “Surprises to Start 2021,” the first Street View video of the New Year, is approved for clients.

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